Financial Statements - Apple Inc. (AAPL) - All Years
Years: 2018, 2019, 2020, 2021, 2022
Item 8. Financial Statements and Supplementary Data | | | | | | | | |
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All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes.
Apple Inc. | 2022 Form 10-K | 28
Apple Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 24, 2022 | | September 25, 2021 | | September 26, 2020 |
| Net sales: | | | | | |
| Products | $ | 316,199 | | | $ | 297,392 | | | $ | 220,747 | |
| Services | 78,129 | | | 68,425 | | | 53,768 | |
| Total net sales | 394,328 | | | 365,817 | | | 274,515 | |
| | | | | |
| Cost of sales: | | | | | |
| Products | 201,471 | | | 192,266 | | | 151,286 | |
| Services | 22,075 | | | 20,715 | | | 18,273 | |
| Total cost of sales | 223,546 | | | 212,981 | | | 169,559 | |
| Gross margin | 170,782 | | | 152,836 | | | 104,956 | |
| | | | | |
Operating expenses: | | | | | |
Research and development | 26,251 | | | 21,914 | | | 18,752 | |
Selling, general and administrative | 25,094 | | | 21,973 | | | 19,916 | |
Total operating expenses | 51,345 | | | 43,887 | | | 38,668 | |
| | | | | |
Operating income | 119,437 | | | 108,949 | | | 66,288 | |
Other income/(expense), net | (334) | | | 258 | | | 803 | |
Income before provision for income taxes | 119,103 | | | 109,207 | | | 67,091 | |
Provision for income taxes | 19,300 | | | 14,527 | | | 9,680 | |
Net income | $ | 99,803 | | | $ | 94,680 | | | $ | 57,411 | |
| | | | | |
Earnings per share: | | | | | |
Basic | $ | 6.15 | | | $ | 5.67 | | | $ | 3.31 | |
Diluted | $ | 6.11 | | | $ | 5.61 | | | $ | 3.28 | |
| | | | | |
Shares used in computing earnings per share: | | | | | |
Basic | 16,215,963 | | | 16,701,272 | | | 17,352,119 | |
Diluted | 16,325,819 | | | 16,864,919 | | | 17,528,214 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2022 Form 10-K | 29
Apple Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 24, 2022 | | September 25, 2021 | | September 26, 2020 |
Net income | $ | 99,803 | | | $ | 94,680 | | | $ | 57,411 | |
| Other comprehensive income/(loss): | | | | | |
Change in foreign currency translation, net of tax | (1,511) | | | 501 | | | 88 | |
| | | | | |
| Change in unrealized gains/losses on derivative instruments, net of tax: | | | | | |
| Change in fair value of derivative instruments | 3,212 | | | 32 | | | 79 | |
Adjustment for net (gains)/losses realized and included in net income | (1,074) | | | 1,003 | | | (1,264) | |
| Total change in unrealized gains/losses on derivative instruments | 2,138 | | | 1,035 | | | (1,185) | |
| | | | | |
Change in unrealized gains/losses on marketable debt securities, net of tax: | | | | | |
Change in fair value of marketable debt securities | (12,104) | | | (694) | | | 1,202 | |
Adjustment for net (gains)/losses realized and included in net income | 205 | | | (273) | | | (63) | |
Total change in unrealized gains/losses on marketable debt securities | (11,899) | | | (967) | | | 1,139 | |
| | | | | |
Total other comprehensive income/(loss) | (11,272) | | | 569 | | | 42 | |
Total comprehensive income | $ | 88,531 | | | $ | 95,249 | | | $ | 57,453 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2022 Form 10-K | 30
Apple Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
| | | | | | | | | | | |
| September 24, 2022 | | September 25, 2021 |
| ASSETS: |
Current assets: | | | |
Cash and cash equivalents | $ | 23,646 | | | $ | 34,940 | |
Marketable securities | 24,658 | | | 27,699 | |
Accounts receivable, net | 28,184 | | | 26,278 | |
Inventories | 4,946 | | | 6,580 | |
Vendor non-trade receivables | 32,748 | | | 25,228 | |
Other current assets | 21,223 | | | 14,111 | |
Total current assets | 135,405 | | | 134,836 | |
| | | |
Non-current assets: | | | |
Marketable securities | 120,805 | | | 127,877 | |
Property, plant and equipment, net | 42,117 | | | 39,440 | |
Other non-current assets | 54,428 | | | 48,849 | |
Total non-current assets | 217,350 | | | 216,166 | |
Total assets | $ | 352,755 | | | $ | 351,002 | |
| | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY: |
Current liabilities: | | | |
Accounts payable | $ | 64,115 | | | $ | 54,763 | |
Other current liabilities | 60,845 | | | 47,493 | |
Deferred revenue | 7,912 | | | 7,612 | |
Commercial paper | 9,982 | | | 6,000 | |
Term debt | 11,128 | | | 9,613 | |
Total current liabilities | 153,982 | | | 125,481 | |
| | | |
Non-current liabilities: | | | |
Term debt | 98,959 | | | 109,106 | |
Other non-current liabilities | 49,142 | | | 53,325 | |
Total non-current liabilities | 148,101 | | | 162,431 | |
Total liabilities | 302,083 | | | 287,912 | |
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Commitments and contingencies | | | |
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Shareholders’ equity: | | | |
Common stock and additional paid-in capital, $0.00001 par value: 50,400,000 shares authorized; 15,943,425 and 16,426,786 shares issued and outstanding, respectively | 64,849 | | | 57,365 | |
| Retained earnings/(Accumulated deficit) | (3,068) | | | 5,562 | |
Accumulated other comprehensive income/(loss) | (11,109) | | | 163 | |
Total shareholders’ equity | 50,672 | | | 63,090 | |
Total liabilities and shareholders’ equity | $ | 352,755 | | | $ | 351,002 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2022 Form 10-K | 31
Apple Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 24, 2022 | | September 25, 2021 | | September 26, 2020 |
| Total shareholders’ equity, beginning balances | $ | 63,090 | | | $ | 65,339 | | | $ | 90,488 | |
| | | | | |
| Common stock and additional paid-in capital: | | | | | |
| Beginning balances | 57,365 | | | 50,779 | | | 45,174 | |
Common stock issued | 1,175 | | | 1,105 | | | 880 | |
Common stock withheld related to net share settlement of equity awards | (2,971) | | | (2,627) | | | (2,250) | |
| Share-based compensation | 9,280 | | | 8,108 | | | 6,975 | |
| Ending balances | 64,849 | | | 57,365 | | | 50,779 | |
| | | | | |
| Retained earnings/(Accumulated deficit): | | | | | |
| Beginning balances | 5,562 | | | 14,966 | | | 45,898 | |
| Net income | 99,803 | | | 94,680 | | | 57,411 | |
| Dividends and dividend equivalents declared | (14,793) | | | (14,431) | | | (14,087) | |
Common stock withheld related to net share settlement of equity awards | (3,454) | | | (4,151) | | | (1,604) | |
| Common stock repurchased | (90,186) | | | (85,502) | | | (72,516) | |
| Cumulative effect of change in accounting principle | — | | | — | | | (136) | |
| Ending balances | (3,068) | | | 5,562 | | | 14,966 | |
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| Accumulated other comprehensive income/(loss): | | | | | |
| Beginning balances | 163 | | | (406) | | | (584) | |
| Other comprehensive income/(loss) | (11,272) | | | 569 | | | 42 | |
| Cumulative effect of change in accounting principle | — | | | — | | | 136 | |
| Ending balances | (11,109) | | | 163 | | | (406) | |
| | | | | |
| Total shareholders’ equity, ending balances | $ | 50,672 | | | $ | 63,090 | | | $ | 65,339 | |
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| Dividends and dividend equivalents declared per share or RSU | $ | 0.90 | | | $ | 0.85 | | | $ | 0.795 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2022 Form 10-K | 32
Apple Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 24, 2022 | | September 25, 2021 | | September 26, 2020 |
Cash, cash equivalents and restricted cash, beginning balances | $ | 35,929 | | | $ | 39,789 | | | $ | 50,224 | |
Operating activities: | | | | | |
Net income | 99,803 | | | 94,680 | | | 57,411 | |
Adjustments to reconcile net income to cash generated by operating activities: | | | | | |
Depreciation and amortization | 11,104 | | | 11,284 | | | 11,056 | |
Share-based compensation expense | 9,038 | | | 7,906 | | | 6,829 | |
| Deferred income tax expense/(benefit) | 895 | | | (4,774) | | | (215) | |
Other | 111 | | | (147) | | | (97) | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net | (1,823) | | | (10,125) | | | 6,917 | |
Inventories | 1,484 | | | (2,642) | | | (127) | |
Vendor non-trade receivables | (7,520) | | | (3,903) | | | 1,553 | |
Other current and non-current assets | (6,499) | | | (8,042) | | | (9,588) | |
Accounts payable | 9,448 | | | 12,326 | | | (4,062) | |
Deferred revenue | 478 | | | 1,676 | | | 2,081 | |
Other current and non-current liabilities | 5,632 | | | 5,799 | | | 8,916 | |
| Cash generated by operating activities | 122,151 | | | 104,038 | | | 80,674 | |
| Investing activities: | | | | | |
Purchases of marketable securities | (76,923) | | | (109,558) | | | (114,938) | |
Proceeds from maturities of marketable securities | 29,917 | | | 59,023 | | | 69,918 | |
Proceeds from sales of marketable securities | 37,446 | | | 47,460 | | | 50,473 | |
Payments for acquisition of property, plant and equipment | (10,708) | | | (11,085) | | | (7,309) | |
Payments made in connection with business acquisitions, net | (306) | | | (33) | | | (1,524) | |
Other | (1,780) | | | (352) | | | (909) | |
| Cash used in investing activities | (22,354) | | | (14,545) | | | (4,289) | |
Financing activities: | | | | | |
Payments for taxes related to net share settlement of equity awards | (6,223) | | | (6,556) | | | (3,634) | |
Payments for dividends and dividend equivalents | (14,841) | | | (14,467) | | | (14,081) | |
Repurchases of common stock | (89,402) | | | (85,971) | | | (72,358) | |
Proceeds from issuance of term debt, net | 5,465 | | | 20,393 | | | 16,091 | |
Repayments of term debt | (9,543) | | | (8,750) | | | (12,629) | |
| Proceeds from/(Repayments of) commercial paper, net | 3,955 | | | 1,022 | | | (963) | |
Other | (160) | | | 976 | | | 754 | |
Cash used in financing activities | (110,749) | | | (93,353) | | | (86,820) | |
| Decrease in cash, cash equivalents and restricted cash | (10,952) | | | (3,860) | | | (10,435) | |
Cash, cash equivalents and restricted cash, ending balances | $ | 24,977 | | | $ | 35,929 | | | $ | 39,789 | |
Supplemental cash flow disclosure: | | | | | |
Cash paid for income taxes, net | $ | 19,573 | | | $ | 25,385 | | | $ | 9,501 | |
Cash paid for interest | $ | 2,865 | | | $ | 2,687 | | | $ | 3,002 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2022 Form 10-K | 33
Apple Inc.
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the “Company”). Intercompany accounts and transactions have been eliminated. The preparation of these consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation.
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. An additional week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters, which will occur in the first quarter of the Company’s fiscal year ending September 30, 2023. The Company’s fiscal years 2022, 2021 and 2020 spanned 52 weeks each. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Revenue Recognition
Net sales consist of revenue from the sale of iPhone, Mac, iPad, Services and other products. The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company’s Products net sales, control transfers when products are shipped. For the Company’s Services net sales, control transfers over time as services are delivered. Payment for Products and Services net sales is collected within a short period following transfer of control or commencement of delivery of services, as applicable.
The Company records reductions to Products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.
For arrangements with multiple performance obligations, which represent promises within an arrangement that are distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings, product-specific business objectives and the estimated cost to provide the performance obligation.
The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud®, Siri® and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided. Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.
For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized revenue, and does not disclose amounts, related to these undelivered services.
Apple Inc. | 2022 Form 10-K | 34
For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of third-party products, including evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product. For third-party applications sold through the App Store and certain digital content sold through the Company’s other digital content stores, the Company does not obtain control of the product before transferring it to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in Services net sales only the commission it retains.
The Company records revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.
Share-Based Compensation
The Company generally measures share-based compensation based on the closing price of the Company’s common stock on the date of grant, and recognizes expense on a straight-line basis for its estimate of equity awards that will ultimately vest. Further information regarding share-based compensation can be found in Note 9, “Benefit Plans.”
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for 2022, 2021 and 2020 (net income in millions and shares in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Numerator: | | | | | |
Net income | $ | 99,803 | | | $ | 94,680 | | | $ | 57,411 | |
| | | | | |
Denominator: | | | | | |
Weighted-average basic shares outstanding | 16,215,963 | | | 16,701,272 | | | 17,352,119 | |
Effect of dilutive securities | 109,856 | | | 163,647 | | | 176,095 | |
Weighted-average diluted shares | 16,325,819 | | | 16,864,919 | | | 17,528,214 | |
| | | | | |
Basic earnings per share | $ | 6.15 | | | $ | 5.67 | | | $ | 3.31 | |
Diluted earnings per share | $ | 6.11 | | | $ | 5.61 | | | $ | 3.28 | |
The Company applies the treasury stock method to determine the dilutive effect of potentially dilutive securities.
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.
The Company’s investments in marketable debt securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date.
The Company’s investments in marketable equity securities are classified based on the nature of the securities and their availability for use in current operations.
The cost of securities sold is determined using the specific identification method.
Inventories
Inventories are measured using the first-in, first-out method.
Apple Inc. | 2022 Form 10-K | 35
Restricted Marketable Securities
The Company considers marketable securities to be restricted when withdrawal or general use is legally restricted. The Company reports restricted marketable securities as current or non-current marketable securities in the Consolidated Balance Sheets based on the classification of the underlying securities.
Property, Plant and Equipment
Depreciation on property, plant and equipment is recognized on a straight-line basis over the estimated useful lives of the assets, which for buildings is the shorter of 40 years or the remaining life of the building; between one and five years for machinery and equipment, including manufacturing equipment; and the shorter of the lease term or useful life for leasehold improvements. Capitalized costs related to internal-use software are amortized on a straight-line basis over the estimated useful lives of the assets, which range from five to seven years. Depreciation and amortization expense on property, plant and equipment was $8.7 billion, $9.5 billion and $9.7 billion during 2022, 2021 and 2020, respectively.
Derivative Instruments and Hedging
All derivative instruments are recorded in the Consolidated Balance Sheets at fair value. The accounting treatment for derivative gains and losses is based on intended use and hedge designation.
Gains and losses arising from amounts that are included in the assessment of cash flow hedge effectiveness are initially deferred in accumulated other comprehensive income/(loss) (“AOCI”) and subsequently reclassified into earnings when the hedged transaction affects earnings, and in the same line item in the Consolidated Statements of Operations. For options designated as cash flow hedges, the Company excludes time value from the assessment of hedge effectiveness and recognizes it on a straight-line basis over the life of the hedge in the Consolidated Statements of Operations line item to which the hedge relates. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in other comprehensive income/(loss) (“OCI”).
Gains and losses arising from amounts that are included in the assessment of fair value hedge effectiveness are recognized in the Consolidated Statements of Operations line item to which the hedge relates along with offsetting losses and gains related to the change in value of the hedged item. For foreign exchange forward contracts designated as fair value hedges, the Company excludes the forward carry component from the assessment of hedge effectiveness and recognizes it in other income/(expense), net (“OI&E”) on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
Gains and losses arising from changes in the fair values of derivative instruments that are not designated as accounting hedges are recognized in the Consolidated Statements of Operations line items to which the derivative instruments relate.
The Company presents derivative assets and liabilities at their gross fair values in the Consolidated Balance Sheets. The Company classifies cash flows related to derivative instruments as operating activities in the Consolidated Statements of Cash Flows.
Fair Value Measurements
The fair values of the Company’s money market funds and certain marketable equity securities are based on quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, which generally have counterparties with high credit ratings, are based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.
Income Taxes
The Company records certain deferred tax assets and liabilities in connection with the minimum tax on certain foreign earnings created by the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”).
Leases
The Company combines and accounts for lease and nonlease components as a single lease component for leases of corporate, data center and retail facilities. The discount rates related to the Company’s lease liabilities are generally based on estimates of the Company’s incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined.
Apple Inc. | 2022 Form 10-K | 36
Segment Reporting
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China mainland, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as those described elsewhere in this Note 1, “Summary of Significant Accounting Policies.”
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as research and development (“R&D”), corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
Note 2 – Revenue
Net sales disaggregated by significant products and services for 2022, 2021 and 2020 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
iPhone (1) | $ | 205,489 | | | $ | 191,973 | | | $ | 137,781 | |
Mac (1) | 40,177 | | | 35,190 | | | 28,622 | |
iPad (1) | 29,292 | | | 31,862 | | | 23,724 | |
Wearables, Home and Accessories (1)(2) | 41,241 | | | 38,367 | | | 30,620 | |
Services (3) | 78,129 | | | 68,425 | | | 53,768 | |
Total net sales (4) | $ | 394,328 | | | $ | 365,817 | | | $ | 274,515 | |
(1)Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.
(2)Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod mini and accessories.
(3)Services net sales include sales from the Company’s advertising, AppleCare, cloud, digital content, payment and other services. Services net sales also include amortization of the deferred value of services bundled in the sales price of certain products.
(4)Includes $7.5 billion of revenue recognized in 2022 that was included in deferred revenue as of September 25, 2021, $6.7 billion of revenue recognized in 2021 that was included in deferred revenue as of September 26, 2020, and $5.0 billion of revenue recognized in 2020 that was included in deferred revenue as of September 28, 2019.
The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and Geographic Data” for 2022, 2021 and 2020, except in Greater China, where iPhone revenue represented a moderately higher proportion of net sales in 2022 and 2021.
As of September 24, 2022 and September 25, 2021, the Company had total deferred revenue of $12.4 billion and $11.9 billion, respectively. As of September 24, 2022, the Company expects 64% of total deferred revenue to be realized in less than a year, 27% within one-to-two years, 7% within two-to-three years and 2% in greater than three years.
Apple Inc. | 2022 Form 10-K | 37
Note 3 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash, cash equivalents and marketable securities by significant investment category as of September 24, 2022 and September 25, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Current Marketable Securities | | Non-Current Marketable Securities |
Cash | $ | 18,546 | | | $ | — | | | $ | — | | | $ | 18,546 | | | $ | 18,546 | | | $ | — | | | $ | — | |
Level 1 (1): | | | | | | | | | | | | | |
| Money market funds | 2,929 | | | — | | | — | | | 2,929 | | | 2,929 | | | — | | | — | |
| Mutual funds | 274 | | | — | | | (47) | | | 227 | | | — | | | 227 | | | — | |
| Subtotal | 3,203 | | | — | | | (47) | | | 3,156 | | | 2,929 | | | 227 | | | — | |
Level 2 (2): | | | | | | | | | | | | | |
| U.S. Treasury securities | 25,134 | | | — | | | (1,725) | | | 23,409 | | | 338 | | | 5,091 | | | 17,980 | |
| U.S. agency securities | 5,823 | | | — | | | (655) | | | 5,168 | | | — | | | 240 | | | 4,928 | |
| Non-U.S. government securities | 16,948 | | | 2 | | | (1,201) | | | 15,749 | | | — | | | 8,806 | | | 6,943 | |
Certificates of deposit and time deposits | 2,067 | | | — | | | — | | | 2,067 | | | 1,805 | | | 262 | | | — | |
| Commercial paper | 718 | | | — | | | — | | | 718 | | | 28 | | | 690 | | | — | |
| Corporate debt securities | 87,148 | | | 9 | | | (7,707) | | | 79,450 | | | — | | | 9,023 | | | 70,427 | |
| Municipal securities | 921 | | | — | | | (35) | | | 886 | | | — | | | 266 | | | 620 | |
Mortgage- and asset-backed securities | 22,553 | | | — | | | (2,593) | | | 19,960 | | | — | | | 53 | | | 19,907 | |
| Subtotal | 161,312 | | | 11 | | | (13,916) | | | 147,407 | | | 2,171 | | | 24,431 | | | 120,805 | |
Total (3) | $ | 183,061 | | | $ | 11 | | | $ | (13,963) | | | $ | 169,109 | | | $ | 23,646 | | | $ | 24,658 | | | $ | 120,805 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Current Marketable Securities | | Non-Current Marketable Securities |
Cash | $ | 17,305 | | | $ | — | | | $ | — | | | $ | 17,305 | | | $ | 17,305 | | | $ | — | | | $ | — | |
Level 1 (1): | | | | | | | | | | | | | |
| Money market funds | 9,608 | | | — | | | — | | | 9,608 | | | 9,608 | | | — | | | — | |
| Mutual funds | 175 | | | 11 | | | (1) | | | 185 | | | — | | | 185 | | | — | |
| Subtotal | 9,783 | | | 11 | | | (1) | | | 9,793 | | | 9,608 | | | 185 | | | — | |
Level 2 (2): | | | | | | | | | | | | | |
| Equity securities | 1,527 | | | — | | | (564) | | | 963 | | | — | | | 963 | | | — | |
| U.S. Treasury securities | 22,878 | | | 102 | | | (77) | | | 22,903 | | | 3,596 | | | 6,625 | | | 12,682 | |
U.S. agency securities | 8,949 | | | 2 | | | (64) | | | 8,887 | | | 1,775 | | | 1,930 | | | 5,182 | |
Non-U.S. government securities | 20,201 | | | 211 | | | (101) | | | 20,311 | | | 390 | | | 3,091 | | | 16,830 | |
Certificates of deposit and time deposits | 1,300 | | | — | | | — | | | 1,300 | | | 490 | | | 810 | | | — | |
Commercial paper | 2,639 | | | — | | | — | | | 2,639 | | | 1,776 | | | 863 | | | — | |
Corporate debt securities | 83,883 | | | 1,242 | | | (267) | | | 84,858 | | | — | | | 12,327 | | | 72,531 | |
Municipal securities | 967 | | | 14 | | | — | | | 981 | | | — | | | 130 | | | 851 | |
Mortgage- and asset-backed securities | 20,529 | | | 171 | | | (124) | | | 20,576 | | | — | | | 775 | | | 19,801 | |
| Subtotal | 162,873 | | | 1,742 | | | (1,197) | | | 163,418 | | | 8,027 | | | 27,514 | | | 127,877 | |
Total (3) | $ | 189,961 | | | $ | 1,753 | | | $ | (1,198) | | | $ | 190,516 | | | $ | 34,940 | | | $ | 27,699 | | | $ | 127,877 | |
(1)Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
(2)Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
(3)As of September 24, 2022 and September 25, 2021, total marketable securities included $12.7 billion and $17.9 billion, respectively, that were restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements.
Apple Inc. | 2022 Form 10-K | 38
The following table shows the fair value of the Company’s non-current marketable debt securities, by contractual maturity, as of September 24, 2022 (in millions):
| | | | | |
| Due after 1 year through 5 years | $ | 87,031 | |
| Due after 5 years through 10 years | 16,429 | |
| Due after 10 years | 17,345 | |
| Total fair value | $ | 120,805 | |
Derivative Instruments and Hedging
The Company may use derivative instruments to partially offset its business exposure to foreign exchange and interest rate risk. However, the Company may choose not to hedge certain exposures for a variety of reasons including accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange or interest rates.
Foreign Exchange Risk
To protect gross margins from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, option contracts or other instruments, and may designate these instruments as cash flow hedges. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. The Company designates these instruments as either cash flow or fair value hedges. As of September 24, 2022, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for term debt–related foreign currency transactions is 20 years.
The Company may also enter into derivative instruments that are not designated as accounting hedges to protect gross margins from certain fluctuations in foreign currency exchange rates, as well as to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
Interest Rate Risk
To protect the Company’s term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. The Company designates these instruments as either cash flow or fair value hedges.
The notional amounts of the Company’s outstanding derivative instruments as of September 24, 2022 and September 25, 2021 were as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Derivative instruments designated as accounting hedges: | | | |
Foreign exchange contracts | $ | 102,670 | | | $ | 76,475 | |
Interest rate contracts | $ | 20,125 | | | $ | 16,875 | |
| | | |
| Derivative instruments not designated as accounting hedges: | | | |
Foreign exchange contracts | $ | 185,381 | | | $ | 126,918 | |
Apple Inc. | 2022 Form 10-K | 39
The gross fair values of the Company’s derivative assets and liabilities as of September 24, 2022 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 |
| Fair Value of Derivatives Designated as Accounting Hedges | | Fair Value of Derivatives Not Designated as Accounting Hedges | | Total Fair Value |
Derivative assets (1): | | | | | |
Foreign exchange contracts | $ | 4,317 | | | $ | 2,819 | | | $ | 7,136 | |
| | | | | |
| | | | | |
Derivative liabilities (2): | | | | | |
Foreign exchange contracts | $ | 2,205 | | | $ | 2,547 | | | $ | 4,752 | |
Interest rate contracts | $ | 1,367 | | | $ | — | | | $ | 1,367 | |
(1)Derivative assets are measured using Level 2 fair value inputs and are included in other current assets and other non-current assets in the Consolidated Balance Sheets.
(2)Derivative liabilities are measured using Level 2 fair value inputs and are included in other current liabilities and other non-current liabilities in the Consolidated Balance Sheets.
The derivative assets above represent the Company’s gross credit exposure if all counterparties failed to perform. To mitigate credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair values of certain derivatives fluctuate from contractually established thresholds. To further limit credit risk, the Company generally enters into master netting arrangements with the respective counterparties to the Company’s derivative contracts, under which the Company is allowed to settle transactions with a single net amount payable by one party to the other. As of September 24, 2022, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $7.8 billion, resulting in a net derivative asset of $412 million.
The carrying amounts of the Company’s hedged items in fair value hedges as of September 24, 2022 and September 25, 2021 were as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Hedged assets/(liabilities): | | | |
| Current and non-current marketable securities | $ | 13,378 | | | $ | 15,954 | |
| Current and non-current term debt | $ | (18,739) | | | $ | (17,857) | |
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of September 24, 2022, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 10%. The Company’s cellular network carriers accounted for 44% and 42% of total trade receivables as of September 24, 2022 and September 25, 2021, respectively.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture subassemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of September 24, 2022, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 54% and 13%. As of September 25, 2021, the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 52%, 11% and 11%.
Apple Inc. | 2022 Form 10-K | 40
Note 4 – Consolidated Financial Statement Details
The following tables show the Company’s consolidated financial statement details as of September 24, 2022 and September 25, 2021 (in millions):
Property, Plant and Equipment, Net
| | | | | | | | | | | |
| 2022 | | 2021 |
Land and buildings | $ | 22,126 | | | $ | 20,041 | |
Machinery, equipment and internal-use software | 81,060 | | | 78,659 | |
Leasehold improvements | 11,271 | | | 11,023 | |
Gross property, plant and equipment | 114,457 | | | 109,723 | |
Accumulated depreciation and amortization | (72,340) | | | (70,283) | |
Total property, plant and equipment, net | $ | 42,117 | | | $ | 39,440 | |
Other Non-Current Liabilities
| | | | | | | | | | | |
| 2022 | | 2021 |
| Long-term taxes payable | $ | 16,657 | | | $ | 24,689 | |
Other non-current liabilities | 32,485 | | | 28,636 | |
Total other non-current liabilities | $ | 49,142 | | | $ | 53,325 | |
Other Income/(Expense), Net
The following table shows the detail of OI&E for 2022, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Interest and dividend income | $ | 2,825 | | | $ | 2,843 | | | $ | 3,763 | |
Interest expense | (2,931) | | | (2,645) | | | (2,873) | |
| Other income/(expense), net | (228) | | | 60 | | | (87) | |
Total other income/(expense), net | $ | (334) | | | $ | 258 | | | $ | 803 | |
Note 5 – Income Taxes
Provision for Income Taxes and Effective Tax Rate
The provision for income taxes for 2022, 2021 and 2020, consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Federal: | | | | | |
Current | $ | 7,890 | | | $ | 8,257 | | | $ | 6,306 | |
Deferred | (2,265) | | | (7,176) | | | (3,619) | |
Total | 5,625 | | | 1,081 | | | 2,687 | |
State: | | | | | |
Current | 1,519 | | | 1,620 | | | 455 | |
Deferred | 84 | | | (338) | | | 21 | |
Total | 1,603 | | | 1,282 | | | 476 | |
Foreign: | | | | | |
Current | 8,996 | | | 9,424 | | | 3,134 | |
Deferred | 3,076 | | | 2,740 | | | 3,383 | |
Total | 12,072 | | | 12,164 | | | 6,517 | |
Provision for income taxes | $ | 19,300 | | | $ | 14,527 | | | $ | 9,680 | |
The foreign provision for income taxes is based on foreign pretax earnings of $71.3 billion, $68.7 billion and $38.1 billion in 2022, 2021 and 2020, respectively.
Apple Inc. | 2022 Form 10-K | 41
A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate (21% in 2022, 2021 and 2020) to income before provision for income taxes for 2022, 2021 and 2020, is as follows (dollars in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Computed expected tax | $ | 25,012 | | | $ | 22,933 | | | $ | 14,089 | |
State taxes, net of federal effect | 1,518 | | | 1,151 | | | 423 | |
| Impacts of the Act | 542 | | | — | | | (582) | |
| Earnings of foreign subsidiaries | (4,366) | | | (4,715) | | | (2,534) | |
| Foreign-derived intangible income deduction | (296) | | | (1,372) | | | (169) | |
Research and development credit, net | (1,153) | | | (1,033) | | | (728) | |
Excess tax benefits from equity awards | (1,871) | | | (2,137) | | | (930) | |
Other | (86) | | | (300) | | | 111 | |
Provision for income taxes | $ | 19,300 | | | $ | 14,527 | | | $ | 9,680 | |
Effective tax rate | 16.2 | % | | 13.3 | % | | 14.4 | % |
Deferred Tax Assets and Liabilities
As of September 24, 2022 and September 25, 2021, the significant components of the Company’s deferred tax assets and liabilities were (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
Deferred tax assets: | | | |
Amortization and depreciation | $ | 1,496 | | | $ | 5,575 | |
Accrued liabilities and other reserves | 6,515 | | | 5,895 | |
| Lease liabilities | 2,400 | | | 2,406 | |
| Deferred revenue | 5,742 | | | 5,399 | |
| Unrealized losses | 2,913 | | | 53 | |
| Tax credit carryforwards | 6,962 | | | 4,262 | |
| Other | 1,596 | | | 1,639 | |
| Total deferred tax assets | 27,624 | | | 25,229 | |
| Less: Valuation allowance | (7,530) | | | (4,903) | |
Total deferred tax assets, net | 20,094 | | | 20,326 | |
Deferred tax liabilities: | | | |
Minimum tax on foreign earnings | 1,983 | | | 4,318 | |
| Right-of-use assets | 2,163 | | | 2,167 | |
| Unrealized gains | 942 | | | 203 | |
Other | 469 | | | 565 | |
Total deferred tax liabilities | 5,557 | | | 7,253 | |
| Net deferred tax assets | $ | 14,537 | | | $ | 13,073 | |
As of September 24, 2022, the Company had $4.4 billion in foreign tax credit carryforwards in Ireland and $2.5 billion in California R&D credit carryforwards, both of which can be carried forward indefinitely. A valuation allowance has been recorded for the credit carryforwards and a portion of other temporary differences.
Apple Inc. | 2022 Form 10-K | 42
Uncertain Tax Positions
As of September 24, 2022, the total amount of gross unrecognized tax benefits was $16.8 billion, of which $8.0 billion, if recognized, would impact the Company’s effective tax rate. As of September 25, 2021, the total amount of gross unrecognized tax benefits was $15.5 billion, of which $6.6 billion, if recognized, would have impacted the Company’s effective tax rate.
The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2022, 2021 and 2020, is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Beginning balances | $ | 15,477 | | | $ | 16,475 | | | $ | 15,619 | |
Increases related to tax positions taken during a prior year | 2,284 | | | 816 | | | 454 | |
Decreases related to tax positions taken during a prior year | (1,982) | | | (1,402) | | | (791) | |
Increases related to tax positions taken during the current year | 1,936 | | | 1,607 | | | 1,347 | |
Decreases related to settlements with taxing authorities | (28) | | | (1,838) | | | (85) | |
Decreases related to expiration of the statute of limitations | (929) | | | (181) | | | (69) | |
Ending balances | $ | 16,758 | | | $ | 15,477 | | | $ | 16,475 | |
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. Tax years after 2017 for the U.S. federal jurisdiction, and after 2014 in certain major foreign jurisdictions, remain subject to examination. Although the timing of resolution and/or closure of examinations is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease in the next 12 months by as much as $4.8 billion.
European Commission State Aid Decision
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. The Company and Ireland appealed the State Aid Decision to the General Court of the Court of Justice of the European Union (the “General Court”). On July 15, 2020, the General Court annulled the State Aid Decision. On September 25, 2020, the European Commission appealed the General Court’s decision to the European Court of Justice. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the Act.
On an annual basis, the Company may request approval from the Irish Minister for Finance to reduce the recovery amount for certain taxes paid to other countries. As of September 24, 2022, the adjusted recovery amount was €12.7 billion, excluding interest. The adjusted recovery amount plus interest is funded into escrow, where it will remain restricted from general use pending the conclusion of all legal proceedings. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.
Note 6 – Leases
The Company has lease arrangements for certain equipment and facilities, including corporate, data center, manufacturing and retail space. These leases typically have original terms not exceeding 10 years and generally contain multiyear renewal options, some of which are reasonably certain of exercise.
Payments under the Company’s lease arrangements may be fixed or variable, and variable lease payments are primarily based on purchases of output of the underlying leased assets. Lease costs associated with fixed payments on the Company’s operating leases were $1.9 billion, $1.7 billion and $1.5 billion for 2022, 2021 and 2020, respectively. Lease costs associated with variable payments on the Company’s leases were $14.9 billion, $12.9 billion and $9.3 billion for 2022, 2021 and 2020, respectively.
The Company made $1.8 billion, $1.4 billion and $1.5 billion of fixed cash payments related to operating leases in 2022, 2021 and 2020, respectively. Noncash activities involving right-of-use (“ROU”) assets obtained in exchange for lease liabilities were $2.8 billion for 2022, $3.3 billion for 2021 and $10.5 billion for 2020, including the impact of adopting the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-02, Leases (Topic 842) in the first quarter of 2020.
Apple Inc. | 2022 Form 10-K | 43
The following table shows ROU assets and lease liabilities, and the associated financial statement line items, as of September 24, 2022 and September 25, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| Lease-Related Assets and Liabilities | | Financial Statement Line Items | | 2022 | | 2021 | | |
Right-of-use assets: | | | | | | | | |
| Operating leases | | Other non-current assets | | $ | 10,417 | | | $ | 10,087 | | | |
| Finance leases | | Property, plant and equipment, net | | 952 | | | 861 | | | |
| Total right-of-use assets | | | | $ | 11,369 | | | $ | 10,948 | | | |
| | | | | | | | |
Lease liabilities: | | | | | | | | |
| Operating leases | | Other current liabilities | | $ | 1,534 | | | $ | 1,449 | | | |
| | Other non-current liabilities | | 9,936 | | | 9,506 | | | |
| Finance leases | | Other current liabilities | | 129 | | | 79 | | | |
| | Other non-current liabilities | | 812 | | | 769 | | | |
| Total lease liabilities | | | | $ | 12,411 | | | $ | 11,803 | | | |
Lease liability maturities as of September 24, 2022, are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
| 2023 | $ | 1,758 | | | $ | 155 | | | $ | 1,913 | |
| 2024 | 1,742 | | | 130 | | | 1,872 | |
| 2025 | 1,677 | | | 81 | | | 1,758 | |
| 2026 | 1,382 | | | 48 | | | 1,430 | |
| 2027 | 1,143 | | | 34 | | | 1,177 | |
| Thereafter | 5,080 | | | 906 | | | 5,986 | |
| Total undiscounted liabilities | 12,782 | | | 1,354 | | | 14,136 | |
| Less: Imputed interest | (1,312) | | | (413) | | | (1,725) | |
| Total lease liabilities | $ | 11,470 | | | $ | 941 | | | $ | 12,411 | |
The weighted-average remaining lease term related to the Company’s lease liabilities as of September 24, 2022 and September 25, 2021 was 10.1 years and 10.8 years, respectively. The discount rate related to the Company’s lease liabilities as of September 24, 2022 and September 25, 2021 was 2.3% and 2.0%, respectively.
As of September 24, 2022, the Company had $1.2 billion of future payments under additional leases, primarily for corporate facilities and retail space, that had not yet commenced. These leases will commence between 2023 and 2026, with lease terms ranging from less than 1 year to 21 years.
Apple Inc. | 2022 Form 10-K | 44
Note 7 – Debt
Commercial Paper and Repurchase Agreements
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 24, 2022 and September 25, 2021, the Company had $10.0 billion and $6.0 billion of Commercial Paper outstanding, respectively, with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 2.31% and 0.06% as of September 24, 2022 and September 25, 2021, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2022, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Maturities 90 days or less: | | | | | |
| Proceeds from/(Repayments of) commercial paper, net | $ | 5,264 | | | $ | (357) | | | $ | 100 | |
| | | | | |
Maturities greater than 90 days: | | | | | |
Proceeds from commercial paper | 5,948 | | | 7,946 | | | 6,185 | |
Repayments of commercial paper | (7,257) | | | (6,567) | | | (7,248) | |
| Proceeds from/(Repayments of) commercial paper, net | (1,309) | | | 1,379 | | | (1,063) | |
| | | | | |
| Total proceeds from/(repayments of) commercial paper, net | $ | 3,955 | | | $ | 1,022 | | | $ | (963) | |
In 2020, the Company entered into agreements to sell certain of its marketable securities with a promise to repurchase the securities at a specified time and amount (“Repos”). Due to the Company’s continuing involvement with the marketable securities, the Company accounted for its Repos as collateralized borrowings. The Company entered into $5.2 billion of Repos during 2020, all of which had been settled as of September 26, 2020.
Term Debt
The Company has outstanding fixed-rate notes with varying maturities (collectively the “Notes”). The Notes are senior unsecured obligations and interest is payable in arrears. The following table provides a summary of the Company’s term debt as of September 24, 2022 and September 25, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturities (calendar year) | | 2022 | | 2021 |
| Amount (in millions) | | Effective Interest Rate | | Amount (in millions) | | Effective Interest Rate |
| 2013 – 2021 debt issuances: | | | | | | | | | |
| Floating-rate notes | | | $ | — | | | | | $ | 1,750 | | | 0.48% – 0.63% |
Fixed-rate 0.000% – 4.650% notes | 2022 – 2061 | | 106,324 | | | 0.03% – 4.78% | | 116,313 | | | 0.03% – 4.78% |
| | | | | | | | | |
| Fourth quarter 2022 debt issuance: | | | | | | | | | |
Fixed-rate 3.250% – 4.100% notes | 2029 – 2062 | | 5,500 | | | 3.27% – 4.12% | | — | | | |
| Total term debt | | | 111,824 | | | | | 118,063 | | | |
| | | | | | | | | |
Unamortized premium/(discount) and issuance costs, net | | | (374) | | | | | (380) | | | |
| Hedge accounting fair value adjustments | | | (1,363) | | | | | 1,036 | | | |
| Less: Current portion of term debt | | | (11,128) | | | | | (9,613) | | | |
| Total non-current portion of term debt | | | $ | 98,959 | | | | | $ | 109,106 | | | |
To manage interest rate risk on certain of its U.S. dollar–denominated fixed-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to hedging. The Company recognized $2.8 billion, $2.6 billion and $2.8 billion of interest expense on its term debt for 2022, 2021 and 2020, respectively.
Apple Inc. | 2022 Form 10-K | 45
The future principal payments for the Company’s Notes as of September 24, 2022, are as follows (in millions):
| | | | | |
| 2023 | $ | 11,139 | |
| 2024 | 9,910 | |
| 2025 | 10,645 | |
| 2026 | 11,209 | |
| 2027 | 9,631 | |
| Thereafter | 59,290 | |
| Total term debt | $ | 111,824 | |
As of September 24, 2022 and September 25, 2021, the fair value of the Company’s Notes, based on Level 2 inputs, was $98.8 billion and $125.3 billion, respectively.
Note 8 – Shareholders’ Equity
Share Repurchase Program
During 2022, the Company repurchased 569 million shares of its common stock for $90.2 billion under a share repurchase program authorized by the Board of Directors (the “Program”). The Program does not obligate the Company to acquire a minimum amount of shares. Under the Program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
Shares of Common Stock
The following table shows the changes in shares of common stock for 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Common stock outstanding, beginning balances | 16,426,786 | | | 16,976,763 | | | 17,772,945 | |
Common stock repurchased | (568,589) | | | (656,340) | | | (917,270) | |
Common stock issued, net of shares withheld for employee taxes | 85,228 | | | 106,363 | | | 121,088 | |
Common stock outstanding, ending balances | 15,943,425 | | | 16,426,786 | | | 16,976,763 | |
Note 9 – Benefit Plans
2022 Employee Stock Plan
In the second quarter of 2022, shareholders approved the Apple Inc. 2022 Employee Stock Plan (the “2022 Plan”), which provides for broad-based equity grants to employees, including executive officers, and permits the granting of restricted stock units (“RSUs”), stock grants, performance-based awards, stock options and stock appreciation rights. RSUs granted under the 2022 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. RSUs granted under the 2022 Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the 2022 Plan utilizing a factor of two times the number of RSUs canceled or shares withheld. All RSUs granted under the 2022 Plan have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the underlying RSUs. A maximum of approximately 1.3 billion shares were authorized for issuance pursuant to 2022 Plan awards at the time the plan was approved on March 4, 2022.
2014 Employee Stock Plan
The Apple Inc. 2014 Employee Stock Plan (the “2014 Plan”) is a shareholder-approved plan that provided for broad-based equity grants to employees, including executive officers. The 2014 Plan permitted the granting of substantially the same types of equity awards with substantially the same terms as the 2022 Plan. The 2014 Plan also permitted the granting of cash bonus awards. In the third quarter of 2022, the Company terminated the authority to grant new awards under the 2014 Plan.
Apple Inc. | 2022 Form 10-K | 46
Apple Inc. Non-Employee Director Stock Plan
The Apple Inc. Non-Employee Director Stock Plan (the “Director Plan”) is a shareholder-approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the value and relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants, in each case within the limits set forth in the Director Plan and without further shareholder approval. RSUs granted under the Director Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. The Director Plan expires on November 12, 2027. All RSUs granted under the Director Plan are entitled to DERs, which are subject to the same vesting and other terms and conditions as the underlying RSUs. A maximum of approximately 45 million shares (split-adjusted) were authorized for issuance pursuant to Director Plan awards at the time the plan was last amended on November 9, 2021.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder-approved plan under which substantially all employees may voluntarily enroll to purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s eligible compensation and employees may not purchase more than $25,000 of stock during any calendar year. A maximum of approximately 230 million shares (split-adjusted) were authorized for issuance under the Purchase Plan at the time the plan was last amended and restated on March 10, 2015.
401(k) Plan
The Company’s 401(k) Plan is a tax-qualified deferred compensation arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may contribute a portion of their eligible earnings, subject to applicable U.S. Internal Revenue Service and plan limits. The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum of 6% of the employee’s eligible earnings.
Restricted Stock Units
A summary of the Company’s RSU activity and related information for 2022, 2021 and 2020, is as follows:
| | | | | | | | | | | | | | | | | |
| Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value Per RSU | | Aggregate Fair Value (in millions) |
| Balance as of September 28, 2019 | 326,068 | | | $ | 42.30 | | | |
RSUs granted | 156,800 | | | $ | 59.20 | | | |
RSUs vested | (157,743) | | | $ | 40.29 | | | |
RSUs canceled | (14,347) | | | $ | 48.07 | | | |
| Balance as of September 26, 2020 | 310,778 | | | $ | 51.58 | | | |
RSUs granted | 89,363 | | | $ | 116.33 | | | |
RSUs vested | (145,766) | | | $ | 50.71 | | | |
RSUs canceled | (13,948) | | | $ | 68.95 | | | |
| Balance as of September 25, 2021 | 240,427 | | | $ | 75.16 | | | |
RSUs granted | 91,674 | | | $ | 150.70 | | | |
RSUs vested | (115,861) | | | $ | 72.12 | | | |
RSUs canceled | (14,739) | | | $ | 99.77 | | | |
| Balance as of September 24, 2022 | 201,501 | | | $ | 109.48 | | | $ | 30,312 | |
The fair value as of the respective vesting dates of RSUs was $18.2 billion, $19.0 billion and $10.8 billion for 2022, 2021 and 2020, respectively. The majority of RSUs that vested in 2022, 2021 and 2020 were net share settled such that the Company withheld shares with a value equivalent to the employees’ obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 41 million, 53 million and 56 million for 2022, 2021 and 2020, respectively, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments to taxing authorities for employees’ tax obligations were $6.4 billion, $6.8 billion and $3.9 billion in 2022, 2021 and 2020, respectively.
Apple Inc. | 2022 Form 10-K | 47
Share-Based Compensation
The following table shows share-based compensation expense and the related income tax benefit included in the Consolidated Statements of Operations for 2022, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Share-based compensation expense | $ | 9,038 | | | $ | 7,906 | | | $ | 6,829 | |
Income tax benefit related to share-based compensation expense | $ | (4,002) | | | $ | (4,056) | | | $ | (2,476) | |
As of September 24, 2022, the total unrecognized compensation cost related to outstanding RSUs and stock options was $16.7 billion, which the Company expects to recognize over a weighted-average period of 2.6 years.
Note 10 – Commitments and Contingencies
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. The Company also competes for various components with other participants in the markets for smartphones, personal computers, tablets, wearables and accessories. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacities have increased. The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland.
Unconditional Purchase Obligations
The Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for supplier arrangements, internet services and content creation. Future payments under noncancelable unconditional purchase obligations with a remaining term in excess of one year as of September 24, 2022, are as follows (in millions):
| | | | | |
| 2023 | $ | 13,488 | |
| 2024 | 4,876 | |
| 2025 | 1,418 | |
| 2026 | 6,780 | |
| 2027 | 312 | |
| Thereafter | 412 | |
| Total | $ | 27,286 | |
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully resolved. The outcome of litigation is inherently uncertain. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims.
Apple Inc. | 2022 Form 10-K | 48
Note 11 – Segment Information and Geographic Data
The following table shows information by reportable segment for 2022, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Americas: | | | | | |
Net sales | $ | 169,658 | | | $ | 153,306 | | | $ | 124,556 | |
Operating income | $ | 62,683 | | | $ | 53,382 | | | $ | 37,722 | |
| | | | | |
Europe: | | | | | |
Net sales | $ | 95,118 | | | $ | 89,307 | | | $ | 68,640 | |
Operating income | $ | 35,233 | | | $ | 32,505 | | | $ | 22,170 | |
| | | | | |
| Greater China: | | | | | |
Net sales | $ | 74,200 | | | $ | 68,366 | | | $ | 40,308 | |
Operating income | $ | 31,153 | | | $ | 28,504 | | | $ | 15,261 | |
| | | | | |
Japan: | | | | | |
Net sales | $ | 25,977 | | | $ | 28,482 | | | $ | 21,418 | |
Operating income | $ | 12,257 | | | $ | 12,798 | | | $ | 9,279 | |
| | | | | |
Rest of Asia Pacific: | | | | | |
Net sales | $ | 29,375 | | | $ | 26,356 | | | $ | 19,593 | |
Operating income | $ | 11,569 | | | $ | 9,817 | | | $ | 6,808 | |
A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for 2022, 2021 and 2020 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Segment operating income | $ | 152,895 | | | $ | 137,006 | | | $ | 91,240 | |
Research and development expense | (26,251) | | | (21,914) | | | (18,752) | |
Other corporate expenses, net | (7,207) | | | (6,143) | | | (6,200) | |
Total operating income | $ | 119,437 | | | $ | 108,949 | | | $ | 66,288 | |
The U.S. and China were the only countries that accounted for more than 10% of the Company’s net sales in 2022, 2021 and 2020. Net sales for 2022, 2021 and 2020 and long-lived assets as of September 24, 2022 and September 25, 2021 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net sales: | | | | | |
| U.S. | $ | 147,859 | | | $ | 133,803 | | | $ | 109,197 | |
China (1) | 74,200 | | | 68,366 | | | 40,308 | |
Other countries | 172,269 | | | 163,648 | | | 125,010 | |
Total net sales | $ | 394,328 | | | $ | 365,817 | | | $ | 274,515 | |
| | | | | | | | | | | |
| 2022 | | 2021 |
Long-lived assets: | | | |
| U.S. | $ | 31,119 | | | $ | 28,203 | |
China (1) | 7,260 | | | 7,521 | |
Other countries | 3,738 | | | 3,716 | |
Total long-lived assets | $ | 42,117 | | | $ | 39,440 | |
(1)China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of assets related to product manufacturing, retail stores and related infrastructure.
Apple Inc. | 2022 Form 10-K | 49
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 24, 2022 and September 25, 2021, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 24, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Apple Inc. at September 24, 2022 and September 25, 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 24, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), Apple Inc.’s internal control over financial reporting as of September 24, 2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 27, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of Apple Inc.’s management. Our responsibility is to express an opinion on Apple Inc.’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
| | | | | |
| Uncertain Tax Positions |
| Description of the Matter | As discussed in Note 5 to the financial statements, Apple Inc. is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. As of September 24, 2022, the total amount of gross unrecognized tax benefits was $16.8 billion, of which $8.0 billion, if recognized, would impact Apple Inc.’s effective tax rate. In accounting for uncertain tax positions, Apple Inc. uses significant judgment in the interpretation and application of complex domestic and international tax laws. Auditing management’s evaluation of whether an uncertain tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex, involves significant judgment, and is based on interpretations of tax laws and legal rulings. |
Apple Inc. | 2022 Form 10-K | 50
| | | | | |
How We Addressed the Matter in Our Audit | We tested controls relating to the evaluation of uncertain tax positions, including controls over management’s assessment as to whether tax positions are more likely than not to be sustained, management’s process to measure the benefit of its tax positions, and the development of the related disclosures. To evaluate Apple Inc.’s assessment of which tax positions are more likely than not to be sustained, our audit procedures included, among others, reading and evaluating management’s assumptions and analysis, and, as applicable, Apple Inc.’s communications with taxing authorities, that detailed the basis and technical merits of the uncertain tax positions. We involved our tax subject matter resources in assessing the technical merits of certain of Apple Inc.’s tax positions based on our knowledge of relevant tax laws and experience with related taxing authorities. For certain tax positions, we also received external legal counsel confirmation letters and discussed the matters with external advisors and Apple Inc. tax personnel. In addition, we evaluated Apple Inc.’s disclosure in relation to these matters included in Note 5 to the financial statements. |
/s/ Ernst & Young LLP
We have served as Apple Inc.’s auditor since 2009.
San Jose, California
October 27, 2022
Apple Inc. | 2022 Form 10-K | 51
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Apple Inc.’s internal control over financial reporting as of September 24, 2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 24, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of Apple Inc. as of September 24, 2022 and September 25, 2021, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 24, 2022, and the related notes and our report dated October 27, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
Apple Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Apple Inc.’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
October 27, 2022
Apple Inc. | 2022 Form 10-K | 52
Item 8. Financial Statements and Supplementary Data | | | | | | | | |
| Index to Consolidated Financial Statements | | Page |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes.
Apple Inc. | 2021 Form 10-K | 28
Apple Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 25, 2021 | | September 26, 2020 | | September 28, 2019 |
| Net sales: | | | | | |
| Products | $ | 297,392 | | | $ | 220,747 | | | $ | 213,883 | |
| Services | 68,425 | | | 53,768 | | | 46,291 | |
| Total net sales | 365,817 | | | 274,515 | | | 260,174 | |
| | | | | |
| Cost of sales: | | | | | |
| Products | 192,266 | | | 151,286 | | | 144,996 | |
| Services | 20,715 | | | 18,273 | | | 16,786 | |
| Total cost of sales | 212,981 | | | 169,559 | | | 161,782 | |
| Gross margin | 152,836 | | | 104,956 | | | 98,392 | |
| | | | | |
Operating expenses: | | | | | |
Research and development | 21,914 | | | 18,752 | | | 16,217 | |
Selling, general and administrative | 21,973 | | | 19,916 | | | 18,245 | |
Total operating expenses | 43,887 | | | 38,668 | | | 34,462 | |
| | | | | |
Operating income | 108,949 | | | 66,288 | | | 63,930 | |
Other income/(expense), net | 258 | | | 803 | | | 1,807 | |
Income before provision for income taxes | 109,207 | | | 67,091 | | | 65,737 | |
Provision for income taxes | 14,527 | | | 9,680 | | | 10,481 | |
Net income | $ | 94,680 | | | $ | 57,411 | | | $ | 55,256 | |
| | | | | |
Earnings per share: | | | | | |
Basic | $ | 5.67 | | | $ | 3.31 | | | $ | 2.99 | |
Diluted | $ | 5.61 | | | $ | 3.28 | | | $ | 2.97 | |
| | | | | |
Shares used in computing earnings per share: | | | | | |
Basic | 16,701,272 | | | 17,352,119 | | | 18,471,336 | |
Diluted | 16,864,919 | | | 17,528,214 | | | 18,595,651 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2021 Form 10-K | 29
Apple Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 25, 2021 | | September 26, 2020 | | September 28, 2019 |
Net income | $ | 94,680 | | | $ | 57,411 | | | $ | 55,256 | |
| Other comprehensive income/(loss): | | | | | |
Change in foreign currency translation, net of tax | 501 | | | 88 | | | (408) | |
| | | | | |
| Change in unrealized gains/losses on derivative instruments, net of tax: | | | | | |
| Change in fair value of derivative instruments | 32 | | | 79 | | | (661) | |
Adjustment for net (gains)/losses realized and included in net income | 1,003 | | | (1,264) | | | 23 | |
| Total change in unrealized gains/losses on derivative instruments | 1,035 | | | (1,185) | | | (638) | |
| | | | | |
Change in unrealized gains/losses on marketable debt securities, net of tax: | | | | | |
Change in fair value of marketable debt securities | (694) | | | 1,202 | | | 3,802 | |
Adjustment for net (gains)/losses realized and included in net income | (273) | | | (63) | | | 25 | |
Total change in unrealized gains/losses on marketable debt securities | (967) | | | 1,139 | | | 3,827 | |
| | | | | |
Total other comprehensive income/(loss) | 569 | | | 42 | | | 2,781 | |
Total comprehensive income | $ | 95,249 | | | $ | 57,453 | | | $ | 58,037 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2021 Form 10-K | 30
Apple Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
| | | | | | | | | | | |
| September 25, 2021 | | September 26, 2020 |
| ASSETS: |
Current assets: | | | |
Cash and cash equivalents | $ | 34,940 | | | $ | 38,016 | |
Marketable securities | 27,699 | | | 52,927 | |
Accounts receivable, net | 26,278 | | | 16,120 | |
Inventories | 6,580 | | | 4,061 | |
Vendor non-trade receivables | 25,228 | | | 21,325 | |
Other current assets | 14,111 | | | 11,264 | |
Total current assets | 134,836 | | | 143,713 | |
| | | |
Non-current assets: | | | |
Marketable securities | 127,877 | | | 100,887 | |
Property, plant and equipment, net | 39,440 | | | 36,766 | |
Other non-current assets | 48,849 | | | 42,522 | |
Total non-current assets | 216,166 | | | 180,175 | |
Total assets | $ | 351,002 | | | $ | 323,888 | |
| | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY: |
Current liabilities: | | | |
Accounts payable | $ | 54,763 | | | $ | 42,296 | |
Other current liabilities | 47,493 | | | 42,684 | |
Deferred revenue | 7,612 | | | 6,643 | |
Commercial paper | 6,000 | | | 4,996 | |
Term debt | 9,613 | | | 8,773 | |
Total current liabilities | 125,481 | | | 105,392 | |
| | | |
Non-current liabilities: | | | |
Term debt | 109,106 | | | 98,667 | |
Other non-current liabilities | 53,325 | | | 54,490 | |
Total non-current liabilities | 162,431 | | | 153,157 | |
Total liabilities | 287,912 | | | 258,549 | |
| | | |
Commitments and contingencies | | | |
| | | |
Shareholders’ equity: | | | |
Common stock and additional paid-in capital, $0.00001 par value: 50,400,000 shares authorized; 16,426,786 and 16,976,763 shares issued and outstanding, respectively | 57,365 | | | 50,779 | |
Retained earnings | 5,562 | | | 14,966 | |
Accumulated other comprehensive income/(loss) | 163 | | | (406) | |
Total shareholders’ equity | 63,090 | | | 65,339 | |
Total liabilities and shareholders’ equity | $ | 351,002 | | | $ | 323,888 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2021 Form 10-K | 31
Apple Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 25, 2021 | | September 26, 2020 | | September 28, 2019 |
| Total shareholders’ equity, beginning balances | $ | 65,339 | | | $ | 90,488 | | | $ | 107,147 | |
| | | | | |
| Common stock and additional paid-in capital: | | | | | |
| Beginning balances | 50,779 | | | 45,174 | | | 40,201 | |
Common stock issued | 1,105 | | | 880 | | | 781 | |
Common stock withheld related to net share settlement of equity awards | (2,627) | | | (2,250) | | | (2,002) | |
| Share-based compensation | 8,108 | | | 6,975 | | | 6,194 | |
| Ending balances | 57,365 | | | 50,779 | | | 45,174 | |
| | | | | |
| Retained earnings: | | | | | |
| Beginning balances | 14,966 | | | 45,898 | | | 70,400 | |
| Net income | 94,680 | | | 57,411 | | | 55,256 | |
| Dividends and dividend equivalents declared | (14,431) | | | (14,087) | | | (14,129) | |
Common stock withheld related to net share settlement of equity awards | (4,151) | | | (1,604) | | | (1,029) | |
| Common stock repurchased | (85,502) | | | (72,516) | | | (67,101) | |
| Cumulative effects of changes in accounting principles | — | | | (136) | | | 2,501 | |
| Ending balances | 5,562 | | | 14,966 | | | 45,898 | |
| | | | | |
| Accumulated other comprehensive income/(loss): | | | | | |
| Beginning balances | (406) | | | (584) | | | (3,454) | |
| Other comprehensive income/(loss) | 569 | | | 42 | | | 2,781 | |
| Cumulative effects of changes in accounting principles | — | | | 136 | | | 89 | |
| Ending balances | 163 | | | (406) | | | (584) | |
| | | | | |
| Total shareholders’ equity, ending balances | $ | 63,090 | | | $ | 65,339 | | | $ | 90,488 | |
| | | | | |
| Dividends and dividend equivalents declared per share or RSU | $ | 0.85 | | | $ | 0.795 | | | $ | 0.75 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2021 Form 10-K | 32
Apple Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 25, 2021 | | September 26, 2020 | | September 28, 2019 |
Cash, cash equivalents and restricted cash, beginning balances | $ | 39,789 | | | $ | 50,224 | | | $ | 25,913 | |
Operating activities: | | | | | |
Net income | 94,680 | | | 57,411 | | | 55,256 | |
Adjustments to reconcile net income to cash generated by operating activities: | | | | | |
Depreciation and amortization | 11,284 | | | 11,056 | | | 12,547 | |
Share-based compensation expense | 7,906 | | | 6,829 | | | 6,068 | |
| Deferred income tax benefit | (4,774) | | | (215) | | | (340) | |
Other | (147) | | | (97) | | | (652) | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net | (10,125) | | | 6,917 | | | 245 | |
Inventories | (2,642) | | | (127) | | | (289) | |
Vendor non-trade receivables | (3,903) | | | 1,553 | | | 2,931 | |
Other current and non-current assets | (8,042) | | | (9,588) | | | 873 | |
Accounts payable | 12,326 | | | (4,062) | | | (1,923) | |
Deferred revenue | 1,676 | | | 2,081 | | | (625) | |
Other current and non-current liabilities | 5,799 | | | 8,916 | | | (4,700) | |
| Cash generated by operating activities | 104,038 | | | 80,674 | | | 69,391 | |
| Investing activities: | | | | | |
Purchases of marketable securities | (109,558) | | | (114,938) | | | (39,630) | |
Proceeds from maturities of marketable securities | 59,023 | | | 69,918 | | | 40,102 | |
Proceeds from sales of marketable securities | 47,460 | | | 50,473 | | | 56,988 | |
Payments for acquisition of property, plant and equipment | (11,085) | | | (7,309) | | | (10,495) | |
Payments made in connection with business acquisitions, net | (33) | | | (1,524) | | | (624) | |
Purchases of non-marketable securities | (131) | | | (210) | | | (1,001) | |
Proceeds from non-marketable securities | 387 | | | 92 | | | 1,634 | |
Other | (608) | | | (791) | | | (1,078) | |
| Cash generated by/(used in) investing activities | (14,545) | | | (4,289) | | | 45,896 | |
Financing activities: | | | | | |
Proceeds from issuance of common stock | 1,105 | | | 880 | | | 781 | |
Payments for taxes related to net share settlement of equity awards | (6,556) | | | (3,634) | | | (2,817) | |
Payments for dividends and dividend equivalents | (14,467) | | | (14,081) | | | (14,119) | |
Repurchases of common stock | (85,971) | | | (72,358) | | | (66,897) | |
Proceeds from issuance of term debt, net | 20,393 | | | 16,091 | | | 6,963 | |
Repayments of term debt | (8,750) | | | (12,629) | | | (8,805) | |
| Proceeds from/(Repayments of) commercial paper, net | 1,022 | | | (963) | | | (5,977) | |
Other | (129) | | | (126) | | | (105) | |
Cash used in financing activities | (93,353) | | | (86,820) | | | (90,976) | |
| Increase/(Decrease) in cash, cash equivalents and restricted cash | (3,860) | | | (10,435) | | | 24,311 | |
Cash, cash equivalents and restricted cash, ending balances | $ | 35,929 | | | $ | 39,789 | | | $ | 50,224 | |
Supplemental cash flow disclosure: | | | | | |
Cash paid for income taxes, net | $ | 25,385 | | | $ | 9,501 | | | $ | 15,263 | |
Cash paid for interest | $ | 2,687 | | | $ | 3,002 | | | $ | 3,423 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2021 Form 10-K | 33
Apple Inc.
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the “Company”). Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation.
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. An additional week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters. The Company’s fiscal years 2021, 2020 and 2019 spanned 52 weeks each. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Recently Adopted Accounting Pronouncements
Financial Instruments – Credit Losses
At the beginning of the first quarter of 2021, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses on certain financial instruments. The Company adopted ASU 2016-13 utilizing the modified retrospective transition method. The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses.
Share-Based Compensation
The Company generally measures share-based compensation based on the closing price of the Company’s common stock on the date of grant, and recognizes expense on a straight-line basis for its estimate of equity awards that will ultimately vest. Further information regarding share-based compensation can be found in Note 9, “Benefit Plans.”
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for 2021, 2020 and 2019 (net income in millions and shares in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Numerator: | | | | | |
Net income | $ | 94,680 | | | $ | 57,411 | | | $ | 55,256 | |
| | | | | |
Denominator: | | | | | |
Weighted-average basic shares outstanding | 16,701,272 | | | 17,352,119 | | | 18,471,336 | |
Effect of dilutive securities | 163,647 | | | 176,095 | | | 124,315 | |
Weighted-average diluted shares | 16,864,919 | | | 17,528,214 | | | 18,595,651 | |
| | | | | |
Basic earnings per share | $ | 5.67 | | | $ | 3.31 | | | $ | 2.99 | |
Diluted earnings per share | $ | 5.61 | | | $ | 3.28 | | | $ | 2.97 | |
Apple Inc. | 2021 Form 10-K | 34
The Company applies the treasury stock method to determine the dilutive effect of potentially dilutive securities. Potentially dilutive securities representing 62 million shares of common stock were excluded from the computation of diluted earnings per share for 2019 because their effect would have been antidilutive.
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.
The Company’s investments in marketable debt securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Unrealized gains and losses on marketable debt securities classified as available-for-sale are recognized in other comprehensive income/(loss) (“OCI”).
The Company’s investments in marketable equity securities are classified based on the nature of the securities and their availability for use in current operations. The Company’s marketable equity securities are measured at fair value with gains and losses recognized in other income/(expense), net (“OI&E”).
The cost of securities sold is determined using the specific identification method.
Inventories
Inventories are measured using the first-in, first-out method.
Property, Plant and Equipment
Depreciation on property, plant and equipment is recognized on a straight-line basis over the estimated useful lives of the assets, which for buildings is the lesser of 40 years or the remaining life of the building; between one and five years for machinery and equipment, including product tooling and manufacturing process equipment; and the shorter of lease term or useful life for leasehold improvements. Capitalized costs related to internal-use software are amortized on a straight-line basis over the estimated useful lives of the assets, which range from five to seven years. Depreciation and amortization expense on property and equipment was $9.5 billion, $9.7 billion and $11.3 billion during 2021, 2020 and 2019, respectively.
Noncash investing activities involving property, plant and equipment resulted in a net decrease to accounts payable and other current liabilities of $2.9 billion during 2019.
Restricted Cash and Restricted Marketable Securities
The Company considers cash and marketable securities to be restricted when withdrawal or general use is legally restricted. The Company reports restricted cash as other assets in the Consolidated Balance Sheets, and determines current or non-current classification based on the expected duration of the restriction. The Company reports restricted marketable securities as current or non-current marketable securities in the Consolidated Balance Sheets based on the classification of the underlying securities.
Derivative Instruments and Hedging
All derivative instruments are recorded in the Consolidated Balance Sheets at fair value. The accounting treatment for derivative gains and losses is based on intended use and hedge designation.
Gains and losses arising from amounts that are included in the assessment of cash flow hedge effectiveness are initially deferred in accumulated other comprehensive income/(loss) (“AOCI”) and subsequently reclassified into earnings when the hedged transaction affects earnings, and in the same line item in the Consolidated Statements of Operations. For options designated as cash flow hedges, the Company excludes time value from the assessment of hedge effectiveness and recognizes it on a straight-line basis over the life of the hedge in the Consolidated Statements of Operations line item to which the hedge relates. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
Gains and losses arising from amounts that are included in the assessment of fair value hedge effectiveness are recognized in the Consolidated Statements of Operations line item to which the hedge relates along with offsetting losses and gains related to the change in value of the hedged item. For foreign exchange forward contracts designated as fair value hedges, the Company excludes the forward carry component from the assessment of hedge effectiveness and recognizes it in OI&E on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
Gains and losses arising from changes in the fair values of derivative instruments that are not designated as accounting hedges are recognized in the Consolidated Statements of Operations line items to which the derivative instruments relate.
Apple Inc. | 2021 Form 10-K | 35
The Company presents derivative assets and liabilities at their gross fair values in the Consolidated Balance Sheets. The Company classifies cash flows related to derivative instruments as operating activities in the Consolidated Statements of Cash Flows.
Fair Value Measurements
The fair values of the Company’s money market funds and certain marketable equity securities are based on quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, which generally have counterparties with high credit ratings, are based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.
Note 2 – Revenue Recognition
Net sales consist of revenue from the sale of iPhone, Mac, iPad, Services and other products. The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company’s Products net sales, control transfers when products are shipped. For the Company’s Services net sales, control transfers over time as services are delivered. Payment for Products and Services net sales is collected within a short period following transfer of control or commencement of delivery of services, as applicable.
The Company records reductions to Products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.
For arrangements with multiple performance obligations, which represent promises within an arrangement that are distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings, product-specific business objectives and the estimated cost to provide the performance obligation.
The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud®, Siri and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided. Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.
For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized revenue, and has elected not to disclose amounts, related to these undelivered services.
For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product. For third-party applications sold through the App Store and certain digital content sold through the Company’s other digital content stores, the Company does not obtain control of the product before transferring it to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in Services net sales only the commission it retains.
The Company has elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.
Apple Inc. | 2021 Form 10-K | 36
Deferred Revenue
As of September 25, 2021 and September 26, 2020, the Company had total deferred revenue of $11.9 billion and $10.2 billion, respectively. As of September 25, 2021, the Company expects 64% of total deferred revenue to be realized in less than a year, 26% within one-to-two years, 8% within two-to-three years and 2% in greater than three years.
Disaggregated Revenue
Net sales disaggregated by significant products and services for 2021, 2020 and 2019 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
iPhone (1) | $ | 191,973 | | | $ | 137,781 | | | $ | 142,381 | |
Mac (1) | 35,190 | | | 28,622 | | | 25,740 | |
iPad (1) | 31,862 | | | 23,724 | | | 21,280 | |
Wearables, Home and Accessories (1)(2) | 38,367 | | | 30,620 | | | 24,482 | |
Services (3) | 68,425 | | | 53,768 | | | 46,291 | |
Total net sales (4) | $ | 365,817 | | | $ | 274,515 | | | $ | 260,174 | |
(1)Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.
(2)Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and accessories.
(3)Services net sales include sales from the Company’s advertising, AppleCare, cloud, digital content, payment and other services. Services net sales also include amortization of the deferred value of services bundled in the sales price of certain products.
(4)Includes $6.7 billion of revenue recognized in 2021 that was included in deferred revenue as of September 26, 2020, $5.0 billion of revenue recognized in 2020 that was included in deferred revenue as of September 28, 2019, and $5.9 billion of revenue recognized in 2019 that was included in deferred revenue as of September 29, 2018.
The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and Geographic Data” for 2021, 2020 and 2019.
Apple Inc. | 2021 Form 10-K | 37
Note 3 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash, cash equivalents and marketable securities by significant investment category as of September 25, 2021 and September 26, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Current Marketable Securities | | Non-Current Marketable Securities |
Cash | $ | 17,305 | | | $ | — | | | $ | — | | | $ | 17,305 | | | $ | 17,305 | | | $ | — | | | $ | — | |
Level 1 (1): | | | | | | | | | | | | | |
| Money market funds | 9,608 | | | — | | | — | | | 9,608 | | | 9,608 | | | — | | | — | |
| Mutual funds | 175 | | | 11 | | | (1) | | | 185 | | | — | | | 185 | | | — | |
| Subtotal | 9,783 | | | 11 | | | (1) | | | 9,793 | | | 9,608 | | | 185 | | | — | |
Level 2 (2): | | | | | | | | | | | | | |
| Equity securities | 1,527 | | | — | | | (564) | | | 963 | | | — | | | 963 | | | — | |
| U.S. Treasury securities | 22,878 | | | 102 | | | (77) | | | 22,903 | | | 3,596 | | | 6,625 | | | 12,682 | |
| U.S. agency securities | 8,949 | | | 2 | | | (64) | | | 8,887 | | | 1,775 | | | 1,930 | | | 5,182 | |
| Non-U.S. government securities | 20,201 | | | 211 | | | (101) | | | 20,311 | | | 390 | | | 3,091 | | | 16,830 | |
Certificates of deposit and time deposits | 1,300 | | | — | | | — | | | 1,300 | | | 490 | | | 810 | | | — | |
| Commercial paper | 2,639 | | | — | | | — | | | 2,639 | | | 1,776 | | | 863 | | | — | |
| Corporate debt securities | 83,883 | | | 1,242 | | | (267) | | | 84,858 | | | — | | | 12,327 | | | 72,531 | |
| Municipal securities | 967 | | | 14 | | | — | | | 981 | | | — | | | 130 | | | 851 | |
Mortgage- and asset-backed securities | 20,529 | | | 171 | | | (124) | | | 20,576 | | | — | | | 775 | | | 19,801 | |
| Subtotal | 162,873 | | | 1,742 | | | (1,197) | | | 163,418 | | | 8,027 | | | 27,514 | | | 127,877 | |
Total (3) | $ | 189,961 | | | $ | 1,753 | | | $ | (1,198) | | | $ | 190,516 | | | $ | 34,940 | | | $ | 27,699 | | | $ | 127,877 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Current Marketable Securities | | Non-Current Marketable Securities |
Cash | $ | 17,773 | | | $ | — | | | $ | — | | | $ | 17,773 | | | $ | 17,773 | | | $ | — | | | $ | — | |
Level 1 (1): Money market funds | 2,171 | | | — | | | — | | | 2,171 | | | 2,171 | | | — | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Level 2 (2): | | | | | | | | | | | | | |
| U.S. Treasury securities | 28,439 | | | 331 | | | — | | | 28,770 | | | 8,580 | | | 11,972 | | | 8,218 | |
U.S. agency securities | 8,604 | | | 8 | | | — | | | 8,612 | | | 2,009 | | | 3,078 | | | 3,525 | |
Non-U.S. government securities | 19,361 | | | 275 | | | (186) | | | 19,450 | | | 255 | | | 3,329 | | | 15,866 | |
Certificates of deposit and time deposits | 10,399 | | | — | | | — | | | 10,399 | | | 4,043 | | | 6,246 | | | 110 | |
Commercial paper | 11,226 | | | — | | | — | | | 11,226 | | | 3,185 | | | 8,041 | | | — | |
Corporate debt securities | 76,937 | | | 1,834 | | | (175) | | | 78,596 | | | — | | | 19,687 | | | 58,909 | |
Municipal securities | 1,001 | | | 22 | | | — | | | 1,023 | | | — | | | 139 | | | 884 | |
Mortgage- and asset-backed securities | 13,520 | | | 314 | | | (24) | | | 13,810 | | | — | | | 435 | | | 13,375 | |
| Subtotal | 169,487 | | | 2,784 | | | (385) | | | 171,886 | | | 18,072 | | | 52,927 | | | 100,887 | |
Total (3) | $ | 189,431 | | | $ | 2,784 | | | $ | (385) | | | $ | 191,830 | | | $ | 38,016 | | | $ | 52,927 | | | $ | 100,887 | |
(1)Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
(2)Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
(3)As of September 25, 2021 and September 26, 2020, total marketable securities included $17.9 billion and $18.6 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements.
Apple Inc. | 2021 Form 10-K | 38
The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. The following table shows the fair value of the Company’s non-current marketable debt securities, by contractual maturity, as of September 25, 2021 (in millions):
| | | | | |
| Due after 1 year through 5 years | $ | 83,755 | |
| Due after 5 years through 10 years | 23,915 | |
| Due after 10 years | 20,207 | |
| Total fair value | $ | 127,877 | |
The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio.
Derivative Instruments and Hedging
The Company may use derivative instruments to partially offset its business exposure to foreign exchange and interest rate risk. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange or interest rates.
Foreign Exchange Risk
To protect gross margins from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, option contracts or other instruments, and may designate these instruments as cash flow hedges. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. The Company designates these instruments as either cash flow or fair value hedges. As of September 25, 2021, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 21 years.
The Company may also enter into derivative instruments that are not designated as accounting hedges to protect gross margins from certain fluctuations in foreign currency exchange rates, as well as to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
Interest Rate Risk
To protect the Company’s term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. The Company designates these instruments as either cash flow or fair value hedges.
The notional amounts of the Company’s outstanding derivative instruments as of September 25, 2021 and September 26, 2020 were as follows (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Derivative instruments designated as accounting hedges: | | | |
Foreign exchange contracts | $ | 76,475 | | | $ | 57,410 | |
Interest rate contracts | $ | 16,875 | | | $ | 20,700 | |
| | | |
| Derivative instruments not designated as accounting hedges: | | | |
Foreign exchange contracts | $ | 126,918 | | | $ | 88,636 | |
The gross fair values of the Company’s derivative assets and liabilities were not material as of September 25, 2021 and September 26, 2020.
The gains and losses recognized in OCI and amounts reclassified from AOCI to net income for the Company’s derivative instruments designated as cash flow hedges were not material in 2021, 2020 and 2019.
Apple Inc. | 2021 Form 10-K | 39
The carrying amounts of the Company’s hedged items in fair value hedges as of September 25, 2021 and September 26, 2020 were as follows (in millions):
| | | | | | | | | | | | | |
| 2021 | | 2020 | | |
| Hedged assets/(liabilities): | | | | | |
| Current and non-current marketable securities | $ | 15,954 | | | $ | 16,270 | | | |
| Current and non-current term debt | $ | (17,857) | | | $ | (21,033) | | | |
The gains and losses on the Company’s derivative instruments designated as fair value hedges and the related hedged item adjustments were not material in 2021, 2020 and 2019.
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of both September 25, 2021 and September 26, 2020, the Company had no customers that individually represented 10% or more of total trade receivables. The Company’s cellular network carriers accounted for 42% of total trade receivables as of September 25, 2021.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture subassemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of September 25, 2021, the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 52%, 11% and 11%. As of September 26, 2020, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 57% and 11%.
Note 4 – Consolidated Financial Statement Details
The following tables show the Company’s consolidated financial statement details as of September 25, 2021 and September 26, 2020 (in millions):
Property, Plant and Equipment, Net
| | | | | | | | | | | |
| 2021 | | 2020 |
Land and buildings | $ | 20,041 | | | $ | 17,952 | |
Machinery, equipment and internal-use software | 78,659 | | | 75,291 | |
Leasehold improvements | 11,023 | | | 10,283 | |
Gross property, plant and equipment | 109,723 | | | 103,526 | |
Accumulated depreciation and amortization | (70,283) | | | (66,760) | |
Total property, plant and equipment, net | $ | 39,440 | | | $ | 36,766 | |
Other Non-Current Liabilities
| | | | | | | | | | | |
| 2021 | | 2020 |
| Long-term taxes payable | $ | 24,689 | | | $ | 28,170 | |
Other non-current liabilities | 28,636 | | | 26,320 | |
Total other non-current liabilities | $ | 53,325 | | | $ | 54,490 | |
Apple Inc. | 2021 Form 10-K | 40
Other Income/(Expense), Net
The following table shows the detail of OI&E for 2021, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Interest and dividend income | $ | 2,843 | | | $ | 3,763 | | | $ | 4,961 | |
Interest expense | (2,645) | | | (2,873) | | | (3,576) | |
| Other income/(expense), net | 60 | | | (87) | | | 422 | |
Total other income/(expense), net | $ | 258 | | | $ | 803 | | | $ | 1,807 | |
Note 5 – Income Taxes
Provision for Income Taxes and Effective Tax Rate
The provision for income taxes for 2021, 2020 and 2019, consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Federal: | | | | | |
Current | $ | 8,257 | | | $ | 6,306 | | | $ | 6,384 | |
Deferred | (7,176) | | | (3,619) | | | (2,939) | |
Total | 1,081 | | | 2,687 | | | 3,445 | |
State: | | | | | |
Current | 1,620 | | | 455 | | | 475 | |
Deferred | (338) | | | 21 | | | (67) | |
Total | 1,282 | | | 476 | | | 408 | |
Foreign: | | | | | |
Current | 9,424 | | | 3,134 | | | 3,962 | |
Deferred | 2,740 | | | 3,383 | | | 2,666 | |
Total | 12,164 | | | 6,517 | | | 6,628 | |
Provision for income taxes | $ | 14,527 | | | $ | 9,680 | | | $ | 10,481 | |
The foreign provision for income taxes is based on foreign pretax earnings of $68.7 billion, $38.1 billion and $44.3 billion in 2021, 2020 and 2019, respectively.
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (21% in 2021, 2020 and 2019) to income before provision for income taxes for 2021, 2020 and 2019, is as follows (dollars in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Computed expected tax | $ | 22,933 | | | $ | 14,089 | | | $ | 13,805 | |
State taxes, net of federal effect | 1,151 | | | 423 | | | 423 | |
| Impacts of the U.S. Tax Cuts and Jobs Act of 2017 | — | | | (582) | | | — | |
| Earnings of foreign subsidiaries | (4,715) | | | (2,534) | | | (2,625) | |
| Foreign-derived intangible income deduction | (1,372) | | | (169) | | | (149) | |
Research and development credit, net | (1,033) | | | (728) | | | (548) | |
Excess tax benefits from equity awards | (2,137) | | | (930) | | | (639) | |
Other | (300) | | | 111 | | | 214 | |
Provision for income taxes | $ | 14,527 | | | $ | 9,680 | | | $ | 10,481 | |
Effective tax rate | 13.3 | % | | 14.4 | % | | 15.9 | % |
Apple Inc. | 2021 Form 10-K | 41
Deferred Tax Assets and Liabilities
As of September 25, 2021 and September 26, 2020, the significant components of the Company’s deferred tax assets and liabilities were (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Deferred tax assets: | | | |
Amortization and depreciation | $ | 5,575 | | | $ | 8,317 | |
Accrued liabilities and other reserves | 5,895 | | | 4,934 | |
| Lease liabilities | 2,406 | | | 2,038 | |
| Deferred revenue | 5,399 | | | 1,638 | |
| Tax credit carryforwards | 4,262 | | | 797 | |
| Other | 1,639 | | | 1,612 | |
| Total deferred tax assets | 25,176 | | | 19,336 | |
| Less: Valuation allowance | (4,903) | | | (1,041) | |
Total deferred tax assets, net | 20,273 | | | 18,295 | |
Deferred tax liabilities: | | | |
Minimum tax on foreign earnings | 4,318 | | | 7,045 | |
| Right-of-use assets | 2,167 | | | 1,862 | |
| Unrealized gains | 203 | | | 526 | |
Other | 512 | | | 705 | |
Total deferred tax liabilities | 7,200 | | | 10,138 | |
| Net deferred tax assets | $ | 13,073 | | | $ | 8,157 | |
Deferred tax assets and liabilities reflect the effects of tax credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company has elected to record certain deferred tax assets and liabilities in connection with the minimum tax on certain foreign earnings created by the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”).
As of September 25, 2021, the Company had $2.6 billion in foreign tax credit carryforwards in Ireland and $1.6 billion in California research and development credit carryforwards, both of which can be carried forward indefinitely. A valuation allowance has been recorded for the tax credit carryforwards and a portion of other temporary differences.
Uncertain Tax Positions
As of September 25, 2021, the total amount of gross unrecognized tax benefits was $15.5 billion, of which $6.6 billion, if recognized, would impact the Company’s effective tax rate. As of September 26, 2020, the total amount of gross unrecognized tax benefits was $16.5 billion, of which $8.8 billion, if recognized, would have impacted the Company’s effective tax rate.
The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2021, 2020 and 2019, is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Beginning balances | $ | 16,475 | | | $ | 15,619 | | | $ | 9,694 | |
Increases related to tax positions taken during a prior year | 816 | | | 454 | | | 5,845 | |
Decreases related to tax positions taken during a prior year | (1,402) | | | (791) | | | (686) | |
Increases related to tax positions taken during the current year | 1,607 | | | 1,347 | | | 1,697 | |
Decreases related to settlements with taxing authorities | (1,838) | | | (85) | | | (852) | |
Decreases related to expiration of the statute of limitations | (181) | | | (69) | | | (79) | |
Ending balances | $ | 15,477 | | | $ | 16,475 | | | $ | 15,619 | |
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. Tax years after 2015 for the U.S. federal jurisdiction, and after 2014 in certain major foreign jurisdictions, remain subject to examination. Although the timing of resolution and/or closure of examinations is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease in the next 12 months by as much as $1.2 billion.
Apple Inc. | 2021 Form 10-K | 42
Interest and Penalties
The Company includes interest and penalties related to income tax matters within the provision for income taxes. As of September 25, 2021 and September 26, 2020, the total amount of gross interest and penalties accrued was $1.5 billion and $1.4 billion, respectively. The Company recognized interest and penalty expense of $219 million, $85 million and $73 million in 2021, 2020 and 2019, respectively.
European Commission State Aid Decision
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. The Company and Ireland appealed the State Aid Decision to the General Court of the Court of Justice of the European Union (the “General Court”). On July 15, 2020, the General Court annulled the State Aid Decision. On September 25, 2020, the European Commission appealed the General Court’s decision to the European Court of Justice. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the Act.
On an annual basis, the Company may request approval from the Irish Minister for Finance to reduce the recovery amount for certain taxes paid to other countries. As of September 25, 2021, the adjusted recovery amount was €12.7 billion, excluding interest. The adjusted recovery amount plus interest is funded into escrow, where it will remain restricted from general use pending the conclusion of all legal proceedings. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.
Note 6 – Leases
The Company has lease arrangements for certain equipment and facilities, including retail, corporate, manufacturing and data center space. These leases typically have original terms not exceeding 10 years and generally contain multiyear renewal options, some of which are reasonably certain of exercise. The Company’s lease arrangements may contain both lease and nonlease components. The Company has elected to combine and account for lease and nonlease components as a single lease component for leases of retail, corporate, and data center facilities.
Payments under the Company’s lease arrangements may be fixed or variable, and variable lease payments are primarily based on purchases of output of the underlying leased assets. Lease costs associated with fixed payments on the Company’s operating leases were $1.7 billion and $1.5 billion for 2021 and 2020, respectively. Lease costs associated with variable payments on the Company’s leases were $12.9 billion and $9.3 billion for 2021 and 2020, respectively. Rent expense for operating leases, as previously reported under former lease accounting standards, was $1.3 billion in 2019.
The Company made $1.4 billion and $1.5 billion of fixed cash payments related to operating leases in 2021 and 2020, respectively. Noncash activities involving right-of-use (“ROU”) assets obtained in exchange for lease liabilities were $3.3 billion for 2021 and $10.5 billion for 2020, including the impact of adopting FASB ASU No. 2016-02, Leases (Topic 842) in the first quarter of 2020.
The following table shows ROU assets and lease liabilities, and the associated financial statement line items, as of September 25, 2021 and September 26, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| Lease-Related Assets and Liabilities | | Financial Statement Line Items | | 2021 | | 2020 | | |
Right-of-use assets: | | | | | | | | |
| Operating leases | | Other non-current assets | | $ | 10,087 | | | $ | 8,570 | | | |
| Finance leases | | Property, plant and equipment, net | | 861 | | | 629 | | | |
| Total right-of-use assets | | | | $ | 10,948 | | | $ | 9,199 | | | |
| | | | | | | | |
Lease liabilities: | | | | | | | | |
| Operating leases | | Other current liabilities | | $ | 1,449 | | | $ | 1,436 | | | |
| | Other non-current liabilities | | 9,506 | | | 7,745 | | | |
| Finance leases | | Other current liabilities | | 79 | | | 24 | | | |
| | Other non-current liabilities | | 769 | | | 637 | | | |
| Total lease liabilities | | | | $ | 11,803 | | | $ | 9,842 | | | |
Apple Inc. | 2021 Form 10-K | 43
Lease liability maturities as of September 25, 2021, are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
| 2022 | $ | 1,629 | | | $ | 104 | | | $ | 1,733 | |
| 2023 | 1,560 | | | 123 | | | 1,683 | |
| 2024 | 1,499 | | | 99 | | | 1,598 | |
| 2025 | 1,251 | | | 46 | | | 1,297 | |
| 2026 | 1,061 | | | 26 | | | 1,087 | |
| Thereafter | 5,187 | | | 868 | | | 6,055 | |
| Total undiscounted liabilities | 12,187 | | | 1,266 | | | 13,453 | |
| Less: Imputed interest | (1,232) | | | (418) | | | (1,650) | |
| Total lease liabilities | $ | 10,955 | | | $ | 848 | | | $ | 11,803 | |
The weighted-average remaining lease term related to the Company’s lease liabilities as of September 25, 2021 and September 26, 2020 was 10.8 years and 10.3 years, respectively.
The discount rate related to the Company’s lease liabilities as of both September 25, 2021 and September 26, 2020 was 2.0%. The discount rates are generally based on estimates of the Company’s incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined.
As of September 25, 2021, the Company had $1.1 billion of future payments under additional leases, primarily for corporate facilities and retail space, that had not yet commenced. These leases will commence between 2022 and 2023, with lease terms ranging from 3 years to 20 years.
Note 7 – Debt
Commercial Paper and Repurchase Agreements
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 25, 2021 and September 26, 2020, the Company had $6.0 billion and $5.0 billion of Commercial Paper outstanding, respectively, with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 0.06% and 0.62% as of September 25, 2021 and September 26, 2020, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2021, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Maturities 90 days or less: | | | | | |
| Proceeds from/(Repayments of) commercial paper, net | $ | (357) | | | $ | 100 | | | $ | (3,248) | |
| | | | | |
Maturities greater than 90 days: | | | | | |
Proceeds from commercial paper | 7,946 | | | 6,185 | | | 13,874 | |
Repayments of commercial paper | (6,567) | | | (7,248) | | | (16,603) | |
| Proceeds from/(Repayments of) commercial paper, net | 1,379 | | | (1,063) | | | (2,729) | |
| | | | | |
| Total proceeds from/(repayments of) commercial paper, net | $ | 1,022 | | | $ | (963) | | | $ | (5,977) | |
In 2020, the Company entered into agreements to sell certain of its marketable securities with a promise to repurchase the securities at a specified time and amount (“Repos”). Due to the Company’s continuing involvement with the marketable securities, the Company accounted for its Repos as collateralized borrowings. The Company entered into $5.2 billion of Repos during 2020, all of which had been settled as of September 26, 2020.
Apple Inc. | 2021 Form 10-K | 44
Term Debt
As of September 25, 2021, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $118.1 billion (collectively the “Notes”). The Notes are senior unsecured obligations and interest is payable in arrears. The following table provides a summary of the Company’s term debt as of September 25, 2021 and September 26, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturities (calendar year) | | 2021 | | 2020 |
| Amount (in millions) | | Effective Interest Rate | | Amount (in millions) | | Effective Interest Rate |
| 2013 – 2020 debt issuances: | | | | | | | | | |
| Floating-rate notes | 2022 | | $ | 1,750 | | | 0.48% – 0.63% | | $ | 2,250 | | | 0.60% – 1.39% |
Fixed-rate 0.000% – 4.650% notes | 2022 – 2060 | | 95,813 | | | 0.03% – 4.78% | | 103,828 | | | 0.03% – 4.78% |
| | | | | | | | | |
| Second quarter 2021 debt issuance: | | | | | | | | | |
Fixed-rate 0.700% – 2.800% notes | 2026 – 2061 | | 14,000 | | | 0.75% – 2.81% | | — | | | — | % |
| | | | | | | | | |
| Fourth quarter 2021 debt issuance: | | | | | | | | | |
Fixed-rate 1.400% – 2.850% notes | 2028 – 2061 | | 6,500 | | | 1.43% – 2.86% | | — | | | — | % |
| Total term debt | | | 118,063 | | | | | 106,078 | | | |
| | | | | | | | | |
Unamortized premium/(discount) and issuance costs, net | | | (380) | | | | | (314) | | | |
| Hedge accounting fair value adjustments | | | 1,036 | | | | | 1,676 | | | |
| Less: Current portion of term debt | | | (9,613) | | | | | (8,773) | | | |
| Total non-current portion of term debt | | | $ | 109,106 | | | | | $ | 98,667 | | | |
To manage interest rate risk on certain of its U.S. dollar–denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to hedging. The Company recognized $2.6 billion, $2.8 billion and $3.2 billion of interest expense on its term debt for 2021, 2020 and 2019, respectively.
The future principal payments for the Company’s Notes as of September 25, 2021, are as follows (in millions):
| | | | | |
| 2022 | $ | 9,583 | |
| 2023 | 11,391 | |
| 2024 | 10,202 | |
| 2025 | 10,914 | |
| 2026 | 11,408 | |
| Thereafter | 64,565 | |
| Total term debt | $ | 118,063 | |
As of September 25, 2021 and September 26, 2020, the fair value of the Company’s Notes, based on Level 2 inputs, was $125.3 billion and $117.1 billion, respectively.
Apple Inc. | 2021 Form 10-K | 45
Note 8 – Shareholders’ Equity
Share Repurchase Program
As of September 25, 2021, the Company was authorized to purchase up to $315 billion of the Company’s common stock under a share repurchase program (the “Program”). During 2021, the Company repurchased 656 million shares of its common stock for $85.5 billion, including 36 million shares delivered under a $5.0 billion accelerated share repurchase agreement entered into in May 2021, bringing the total utilization under the Program to $254.1 billion as of September 25, 2021. The Program does not obligate the Company to acquire any specific number of shares. Under the Program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Shares of Common Stock
The following table shows the changes in shares of common stock for 2021, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Common stock outstanding, beginning balances | 16,976,763 | | | 17,772,945 | | | 19,019,943 | |
Common stock repurchased | (656,340) | | | (917,270) | | | (1,380,819) | |
Common stock issued, net of shares withheld for employee taxes | 106,363 | | | 121,088 | | | 133,821 | |
Common stock outstanding, ending balances | 16,426,786 | | | 16,976,763 | | | 17,772,945 | |
Note 9 – Benefit Plans
2014 Employee Stock Plan
The 2014 Employee Stock Plan (the “2014 Plan”) is a shareholder-approved plan that provides for broad-based equity grants to employees, including executive officers, and permits the granting of restricted stock units (“RSUs”), stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards. RSUs granted under the 2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. RSUs granted under the 2014 Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the 2014 Plan utilizing a factor of two times the number of RSUs canceled or shares withheld. All RSUs granted under the 2014 Plan have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the underlying RSUs. As of September 25, 2021, approximately 760 million shares were reserved for future issuance under the 2014 Plan. Shares subject to outstanding awards under the 2003 Employee Stock Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations for RSUs, will also be available for awards under the 2014 Plan.
Apple Inc. Non-Employee Director Stock Plan
The Apple Inc. Non-Employee Director Stock Plan (the “Director Plan”) is a shareholder-approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the value and relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants, in each case within the limits set forth in the Director Plan and without further shareholder approval. RSUs granted under the Director Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. The Director Plan expires on November 12, 2027. All RSUs granted under the Director Plan are entitled to DERs, which are subject to the same vesting and other terms and conditions as the underlying RSUs. As of September 25, 2021, approximately 4 million shares were reserved for future issuance under the Director Plan.
Rule 10b5-1 Trading Plans
During the three months ended September 25, 2021, Section 16 officers Katherine L. Adams, Timothy D. Cook, Luca Maestri, Deirdre O’Brien and Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that preestablishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired under the Company’s employee and director equity plans.
Apple Inc. | 2021 Form 10-K | 46
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder-approved plan under which substantially all employees may voluntarily enroll to purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 25, 2021, approximately 96 million shares were reserved for future issuance under the Purchase Plan.
401(k) Plan
The Company’s 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pretax earnings, up to the U.S. Internal Revenue Service annual contribution limit ($19,500 for calendar year 2021). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum of 6% of the employee’s eligible earnings.
Restricted Stock Units
A summary of the Company’s RSU activity and related information for 2021, 2020 and 2019, is as follows:
| | | | | | | | | | | | | | | | | |
| Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value Per RSU | | Aggregate Fair Value (in millions) |
| Balance as of September 29, 2018 | 368,618 | | | $ | 33.65 | | | |
RSUs granted | 147,409 | | | $ | 53.99 | | | |
RSUs vested | (168,350) | | | $ | 33.80 | | | |
RSUs canceled | (21,609) | | | $ | 40.71 | | | |
| Balance as of September 28, 2019 | 326,068 | | | $ | 42.30 | | | |
RSUs granted | 156,800 | | | $ | 59.20 | | | |
RSUs vested | (157,743) | | | $ | 40.29 | | | |
RSUs canceled | (14,347) | | | $ | 48.07 | | | |
| Balance as of September 26, 2020 | 310,778 | | | $ | 51.58 | | | |
RSUs granted | 89,363 | | | $ | 116.33 | | | |
RSUs vested | (145,766) | | | $ | 50.71 | | | |
RSUs canceled | (13,948) | | | $ | 68.95 | | | |
| Balance as of September 25, 2021 | 240,427 | | | $ | 75.16 | | | $ | 35,324 | |
The fair value as of the respective vesting dates of RSUs was $19.0 billion, $10.8 billion and $8.6 billion for 2021, 2020 and 2019, respectively. The majority of RSUs that vested in 2021, 2020 and 2019 were net share settled such that the Company withheld shares with a value equivalent to the employees’ obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 53 million, 56 million and 59 million for 2021, 2020 and 2019, respectively, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $6.8 billion, $3.9 billion and $3.0 billion in 2021, 2020 and 2019, respectively.
Share-Based Compensation
The following table shows share-based compensation expense and the related income tax benefit included in the Consolidated Statements of Operations for 2021, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Share-based compensation expense | $ | 7,906 | | | $ | 6,829 | | | $ | 6,068 | |
Income tax benefit related to share-based compensation expense | $ | (4,056) | | | $ | (2,476) | | | $ | (1,967) | |
As of September 25, 2021, the total unrecognized compensation cost related to outstanding RSUs and stock options was $13.6 billion, which the Company expects to recognize over a weighted-average period of 2.5 years.
Apple Inc. | 2021 Form 10-K | 47
Note 10 – Commitments and Contingencies
Accrued Warranty and Guarantees
The following table shows changes in the Company’s accrued warranties and related costs for 2021, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Beginning accrued warranty and related costs | $ | 3,354 | | | $ | 3,570 | | | $ | 3,692 | |
Cost of warranty claims | (2,674) | | | (2,956) | | | (3,857) | |
Accruals for product warranty | 2,684 | | | 2,740 | | | 3,735 | |
Ending accrued warranty and related costs | $ | 3,364 | | | $ | 3,354 | | | $ | 3,570 | |
The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and China mainland. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within net sales.
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. The Company also competes for various components with other participants in the markets for smartphones, personal computers, tablets, wearables and accessories. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacities have increased. The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.
The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland.
Unconditional Purchase Obligations
The Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for content creation, Internet and telecommunications services and supplier arrangements. Future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year as of September 25, 2021, are as follows (in millions):
| | | | | |
| 2022 | $ | 4,551 | |
| 2023 | 2,165 | |
| 2024 | 984 | |
| 2025 | 405 | |
| 2026 | 51 | |
| Thereafter | 28 | |
| Total | $ | 8,184 | |
Apple Inc. | 2021 Form 10-K | 48
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully resolved. The outcome of litigation is inherently uncertain. When a loss related to a legal proceeding or claim is probable and reasonably estimable, the Company accrues its best estimate for the ultimate resolution of the matter. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims, except for the following matters:
VirnetX
VirnetX, Inc. (“VirnetX”) filed a lawsuit against the Company alleging that certain of the Company’s products infringe on patents owned by VirnetX. On April 11, 2018, a jury returned a verdict against the Company in the U.S. District Court for the Eastern District of Texas (the “Eastern Texas District Court”). The Company appealed the verdict to the U.S. Court of Appeals for the Federal Circuit, which remanded the case back to the Eastern Texas District Court, where a retrial was held in October 2020. The jury returned a verdict against the Company and awarded damages of $503 million, which the Company has appealed. The Company has challenged the validity of the patents at issue in the retrial at the U.S. Patent and Trademark Office (the “PTO”), and the PTO has declared the patents invalid, subject to further appeal by VirnetX.
iOS Performance Management Cases
On April 5, 2018, several U.S. federal actions alleging violation of consumer protection laws, fraud, computer intrusion and other causes of action related to the Company’s performance management feature used in its iPhone operating systems, introduced to certain iPhones in iOS updates 10.2.1 and 11.2, were consolidated through a Multidistrict Litigation process into a single action in the U.S. District Court for the Northern District of California (the “Northern California District Court”). On February 28, 2020, the parties in the Multidistrict Litigation reached a settlement to resolve the U.S. federal and California state class actions. On March 18, 2021, the Northern California District Court granted final approval of the Multidistrict Litigation settlement, which will result in an aggregate payment of $310 million to settle all claims. The Company continues to believe that its iPhones were not defective, that the performance management feature introduced with iOS updates 10.2.1 and 11.2 was intended to, and did, improve customers’ user experience, and that the Company did not make any misleading statements or fail to disclose any material information.
French Competition Authority
On March 16, 2020, the French Competition Authority (“FCA”) announced its decision that aspects of the Company’s sales and distribution practices in France violate French competition law, and issued a fine of €1.1 billion. The Company strongly disagrees with the FCA’s decision, and has appealed.
Optis
Optis Wireless Technology, LLC and related entities (“Optis”) filed a lawsuit in the U.S. District Court for the Eastern District of Texas against the Company alleging that certain of the Company’s products infringe on patents owned by Optis. On August 11, 2020, a jury returned a verdict against the Company and awarded damages. In post-trial proceedings, the damages portion of the verdict was set aside. A retrial on damages was held in August 2021 and the jury in that proceeding awarded damages of $300 million against the Company, which the Company plans to appeal.
Note 11 – Segment Information and Geographic Data
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China mainland, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.”
Apple Inc. | 2021 Form 10-K | 49
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
The following table shows information by reportable segment for 2021, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Americas: | | | | | |
Net sales | $ | 153,306 | | | $ | 124,556 | | | $ | 116,914 | |
Operating income | $ | 53,382 | | | $ | 37,722 | | | $ | 35,099 | |
| | | | | |
Europe: | | | | | |
Net sales | $ | 89,307 | | | $ | 68,640 | | | $ | 60,288 | |
Operating income | $ | 32,505 | | | $ | 22,170 | | | $ | 19,195 | |
| | | | | |
| Greater China: | | | | | |
Net sales | $ | 68,366 | | | $ | 40,308 | | | $ | 43,678 | |
Operating income | $ | 28,504 | | | $ | 15,261 | | | $ | 16,232 | |
| | | | | |
Japan: | | | | | |
Net sales | $ | 28,482 | | | $ | 21,418 | | | $ | 21,506 | |
Operating income | $ | 12,798 | | | $ | 9,279 | | | $ | 9,369 | |
| | | | | |
Rest of Asia Pacific: | | | | | |
Net sales | $ | 26,356 | | | $ | 19,593 | | | $ | 17,788 | |
Operating income | $ | 9,817 | | | $ | 6,808 | | | $ | 6,055 | |
A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for 2021, 2020 and 2019 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Segment operating income | $ | 137,006 | | | $ | 91,240 | | | $ | 85,950 | |
Research and development expense | (21,914) | | | (18,752) | | | (16,217) | |
Other corporate expenses, net | (6,143) | | | (6,200) | | | (5,803) | |
Total operating income | $ | 108,949 | | | $ | 66,288 | | | $ | 63,930 | |
Apple Inc. | 2021 Form 10-K | 50
The U.S. and China were the only countries that accounted for more than 10% of the Company’s net sales in 2021, 2020 and 2019. There was no single customer that accounted for more than 10% of net sales in 2021, 2020 and 2019. Net sales for 2021, 2020 and 2019 and long-lived assets as of September 25, 2021 and September 26, 2020 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Net sales: | | | | | |
| U.S. | $ | 133,803 | | | $ | 109,197 | | | $ | 102,266 | |
China (1) | 68,366 | | | 40,308 | | | 43,678 | |
Other countries | 163,648 | | | 125,010 | | | 114,230 | |
Total net sales | $ | 365,817 | | | $ | 274,515 | | | $ | 260,174 | |
| | | | | | | | | | | |
| 2021 | | 2020 |
Long-lived assets: | | | |
| U.S. | $ | 28,203 | | | $ | 25,890 | |
China (1) | 7,521 | | | 7,256 | |
Other countries | 3,716 | | | 3,620 | |
Total long-lived assets | $ | 39,440 | | | $ | 36,766 | |
(1)China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets related to retail stores and related infrastructure.
Apple Inc. | 2021 Form 10-K | 51
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 25, 2021 and September 26, 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 25, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Apple Inc. at September 25, 2021 and September 26, 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 25, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), Apple Inc.’s internal control over financial reporting as of September 25, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 28, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of Apple Inc.’s management. Our responsibility is to express an opinion on Apple Inc.’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
| | | | | |
| Uncertain Tax Positions |
| Description of the Matter | As discussed in Note 5 to the financial statements, Apple Inc. is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. As of September 25, 2021, the total amount of gross unrecognized tax benefits was $15.5 billion, of which $6.6 billion, if recognized, would impact Apple Inc.’s effective tax rate. Apple Inc. uses significant judgment in the calculation of tax liabilities in estimating the impact of uncertainties in the application of technical merits and complex tax laws. Auditing management’s evaluation of whether an uncertain tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex, involves significant judgment, and is based on interpretations of tax laws and legal rulings. |
Apple Inc. | 2021 Form 10-K | 52
| | | | | |
How We Addressed the Matter in Our Audit | We tested controls relating to the evaluation of uncertain tax positions, including controls over management’s assessment as to whether tax positions are more likely than not to be sustained, management’s process to measure the benefit of its tax positions, and the development of the related disclosures. To evaluate Apple Inc.’s assessment of which tax positions are more likely than not to be sustained, our audit procedures included, among others, reading and evaluating management’s assumptions and analysis, and, as applicable, Apple Inc.’s communications with taxing authorities, that detailed the basis and technical merits of the uncertain tax positions. We involved our tax subject matter resources in assessing the technical merits of certain of Apple Inc.’s tax positions based on our knowledge of relevant tax laws and experience with related taxing authorities. For certain tax positions, we also received external legal counsel confirmation letters and discussed the matters with external advisors and Apple Inc. tax personnel. In addition, we evaluated Apple Inc.’s disclosure in relation to these matters included in Note 5 to the financial statements. |
/s/ Ernst & Young LLP
We have served as Apple Inc.’s auditor since 2009.
San Jose, California
October 28, 2021
Apple Inc. | 2021 Form 10-K | 53
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Apple Inc.’s internal control over financial reporting as of September 25, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 25, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of Apple Inc. as of September 25, 2021 and September 26, 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 25, 2021, and the related notes and our report dated October 28, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
Apple Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Apple Inc.’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
October 28, 2021
Apple Inc. | 2021 Form 10-K | 54
Item 8. Financial Statements and Supplementary Data | | | | | | | | |
| Index to Consolidated Financial Statements | | Page |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes.
Apple Inc. | 2020 Form 10-K | 30
Apple Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 26, 2020 | | September 28, 2019 | | September 29, 2018 |
| Net sales: | | | | | |
| Products | $ | 220,747 | | | $ | 213,883 | | | $ | 225,847 | |
| Services | 53,768 | | | 46,291 | | | 39,748 | |
| Total net sales | 274,515 | | | 260,174 | | | 265,595 | |
| | | | | |
| Cost of sales: | | | | | |
| Products | 151,286 | | | 144,996 | | | 148,164 | |
| Services | 18,273 | | | 16,786 | | | 15,592 | |
| Total cost of sales | 169,559 | | | 161,782 | | | 163,756 | |
| Gross margin | 104,956 | | | 98,392 | | | 101,839 | |
| | | | | |
Operating expenses: | | | | | |
Research and development | 18,752 | | | 16,217 | | | 14,236 | |
Selling, general and administrative | 19,916 | | | 18,245 | | | 16,705 | |
Total operating expenses | 38,668 | | | 34,462 | | | 30,941 | |
| | | | | |
Operating income | 66,288 | | | 63,930 | | | 70,898 | |
Other income/(expense), net | 803 | | | 1,807 | | | 2,005 | |
Income before provision for income taxes | 67,091 | | | 65,737 | | | 72,903 | |
Provision for income taxes | 9,680 | | | 10,481 | | | 13,372 | |
Net income | $ | 57,411 | | | $ | 55,256 | | | $ | 59,531 | |
| | | | | |
Earnings per share: | | | | | |
Basic | $ | 3.31 | | | $ | 2.99 | | | $ | 3.00 | |
Diluted | $ | 3.28 | | | $ | 2.97 | | | $ | 2.98 | |
| | | | | |
Shares used in computing earnings per share: | | | | | |
Basic | 17,352,119 | | | 18,471,336 | | | 19,821,510 | |
Diluted | 17,528,214 | | | 18,595,651 | | | 20,000,435 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2020 Form 10-K | 31
Apple Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 26, 2020 | | September 28, 2019 | | September 29, 2018 |
Net income | $ | 57,411 | | | $ | 55,256 | | | $ | 59,531 | |
| Other comprehensive income/(loss): | | | | | |
Change in foreign currency translation, net of tax | 88 | | | (408) | | | (525) | |
| | | | | |
Change in unrealized gains/losses on derivative instruments, net of tax: | | | | | |
Change in fair value of derivatives | 79 | | | (661) | | | 523 | |
Adjustment for net (gains)/losses realized and included in net income | (1,264) | | | 23 | | | 382 | |
Total change in unrealized gains/losses on derivative instruments | (1,185) | | | (638) | | | 905 | |
| | | | | |
Change in unrealized gains/losses on marketable debt securities, net of tax: | | | | | |
Change in fair value of marketable debt securities | 1,202 | | | 3,802 | | | (3,407) | |
Adjustment for net (gains)/losses realized and included in net income | (63) | | | 25 | | | 1 | |
Total change in unrealized gains/losses on marketable debt securities | 1,139 | | | 3,827 | | | (3,406) | |
| | | | | |
Total other comprehensive income/(loss) | 42 | | | 2,781 | | | (3,026) | |
Total comprehensive income | $ | 57,453 | | | $ | 58,037 | | | $ | 56,505 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2020 Form 10-K | 32
Apple Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
| | | | | | | | | | | |
| September 26, 2020 | | September 28, 2019 |
| ASSETS: |
Current assets: | | | |
Cash and cash equivalents | $ | 38,016 | | | $ | 48,844 | |
Marketable securities | 52,927 | | | 51,713 | |
Accounts receivable, net | 16,120 | | | 22,926 | |
Inventories | 4,061 | | | 4,106 | |
Vendor non-trade receivables | 21,325 | | | 22,878 | |
Other current assets | 11,264 | | | 12,352 | |
Total current assets | 143,713 | | | 162,819 | |
| | | |
Non-current assets: | | | |
Marketable securities | 100,887 | | | 105,341 | |
Property, plant and equipment, net | 36,766 | | | 37,378 | |
Other non-current assets | 42,522 | | | 32,978 | |
Total non-current assets | 180,175 | | | 175,697 | |
Total assets | $ | 323,888 | | | $ | 338,516 | |
| | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY: |
Current liabilities: | | | |
Accounts payable | $ | 42,296 | | | $ | 46,236 | |
Other current liabilities | 42,684 | | | 37,720 | |
Deferred revenue | 6,643 | | | 5,522 | |
Commercial paper | 4,996 | | | 5,980 | |
Term debt | 8,773 | | | 10,260 | |
Total current liabilities | 105,392 | | | 105,718 | |
| | | |
Non-current liabilities: | | | |
Term debt | 98,667 | | | 91,807 | |
Other non-current liabilities | 54,490 | | | 50,503 | |
Total non-current liabilities | 153,157 | | | 142,310 | |
Total liabilities | 258,549 | | | 248,028 | |
| | | |
Commitments and contingencies | | | |
| | | |
Shareholders’ equity: | | | |
Common stock and additional paid-in capital, $0.00001 par value: 50,400,000 shares authorized; 16,976,763 and 17,772,945 shares issued and outstanding, respectively | 50,779 | | | 45,174 | |
Retained earnings | 14,966 | | | 45,898 | |
Accumulated other comprehensive income/(loss) | (406) | | | (584) | |
Total shareholders’ equity | 65,339 | | | 90,488 | |
Total liabilities and shareholders’ equity | $ | 323,888 | | | $ | 338,516 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2020 Form 10-K | 33
Apple Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 26, 2020 | | September 28, 2019 | | September 29, 2018 |
| Total shareholders’ equity, beginning balances | $ | 90,488 | | | $ | 107,147 | | | $ | 134,047 | |
| | | | | |
| Common stock and additional paid-in capital: | | | | | |
| Beginning balances | 45,174 | | | 40,201 | | | 35,867 | |
Common stock issued | 880 | | | 781 | | | 669 | |
Common stock withheld related to net share settlement of equity awards | (2,250) | | | (2,002) | | | (1,778) | |
| Share-based compensation | 6,975 | | | 6,194 | | | 5,443 | |
| Ending balances | 50,779 | | | 45,174 | | | 40,201 | |
| | | | | |
| Retained earnings: | | | | | |
| Beginning balances | 45,898 | | | 70,400 | | | 98,330 | |
| Net income | 57,411 | | | 55,256 | | | 59,531 | |
| Dividends and dividend equivalents declared | (14,087) | | | (14,129) | | | (13,735) | |
Common stock withheld related to net share settlement of equity awards | (1,604) | | | (1,029) | | | (948) | |
| Common stock repurchased | (72,516) | | | (67,101) | | | (73,056) | |
| Cumulative effects of changes in accounting principles | (136) | | | 2,501 | | | 278 | |
| Ending balances | 14,966 | | | 45,898 | | | 70,400 | |
| | | | | |
| Accumulated other comprehensive income/(loss): | | | | | |
| Beginning balances | (584) | | | (3,454) | | | (150) | |
| Other comprehensive income/(loss) | 42 | | | 2,781 | | | (3,026) | |
| Cumulative effects of changes in accounting principles | 136 | | | 89 | | | (278) | |
| Ending balances | (406) | | | (584) | | | (3,454) | |
| | | | | |
| Total shareholders’ equity, ending balances | $ | 65,339 | | | $ | 90,488 | | | $ | 107,147 | |
| | | | | |
| Dividends and dividend equivalents declared per share or RSU | $ | 0.795 | | | $ | 0.75 | | | $ | 0.68 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2020 Form 10-K | 34
Apple Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| Years ended |
| September 26, 2020 | | September 28, 2019 | | September 29, 2018 |
Cash, cash equivalents and restricted cash, beginning balances | $ | 50,224 | | | $ | 25,913 | | | $ | 20,289 | |
Operating activities: | | | | | |
Net income | 57,411 | | | 55,256 | | | 59,531 | |
Adjustments to reconcile net income to cash generated by operating activities: | | | | | |
Depreciation and amortization | 11,056 | | | 12,547 | | | 10,903 | |
Share-based compensation expense | 6,829 | | | 6,068 | | | 5,340 | |
| Deferred income tax benefit | (215) | | | (340) | | | (32,590) | |
Other | (97) | | | (652) | | | (444) | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net | 6,917 | | | 245 | | | (5,322) | |
Inventories | (127) | | | (289) | | | 828 | |
Vendor non-trade receivables | 1,553 | | | 2,931 | | | (8,010) | |
Other current and non-current assets | (9,588) | | | 873 | | | (423) | |
Accounts payable | (4,062) | | | (1,923) | | | 9,175 | |
Deferred revenue | 2,081 | | | (625) | | | (3) | |
Other current and non-current liabilities | 8,916 | | | (4,700) | | | 38,449 | |
| Cash generated by operating activities | 80,674 | | | 69,391 | | | 77,434 | |
Investing activities: | | | | | |
Purchases of marketable securities | (114,938) | | | (39,630) | | | (71,356) | |
Proceeds from maturities of marketable securities | 69,918 | | | 40,102 | | | 55,881 | |
Proceeds from sales of marketable securities | 50,473 | | | 56,988 | | | 47,838 | |
Payments for acquisition of property, plant and equipment | (7,309) | | | (10,495) | | | (13,313) | |
Payments made in connection with business acquisitions, net | (1,524) | | | (624) | | | (721) | |
Purchases of non-marketable securities | (210) | | | (1,001) | | | (1,871) | |
Proceeds from non-marketable securities | 92 | | | 1,634 | | | 353 | |
Other | (791) | | | (1,078) | | | (745) | |
| Cash generated by/(used in) investing activities | (4,289) | | | 45,896 | | | 16,066 | |
Financing activities: | | | | | |
Proceeds from issuance of common stock | 880 | | | 781 | | | 669 | |
Payments for taxes related to net share settlement of equity awards | (3,634) | | | (2,817) | | | (2,527) | |
Payments for dividends and dividend equivalents | (14,081) | | | (14,119) | | | (13,712) | |
Repurchases of common stock | (72,358) | | | (66,897) | | | (72,738) | |
Proceeds from issuance of term debt, net | 16,091 | | | 6,963 | | | 6,969 | |
Repayments of term debt | (12,629) | | | (8,805) | | | (6,500) | |
| Repayments of commercial paper, net | (963) | | | (5,977) | | | (37) | |
Other | (126) | | | (105) | | | — | |
Cash used in financing activities | (86,820) | | | (90,976) | | | (87,876) | |
| Increase/(Decrease) in cash, cash equivalents and restricted cash | (10,435) | | | 24,311 | | | 5,624 | |
Cash, cash equivalents and restricted cash, ending balances | $ | 39,789 | | | $ | 50,224 | | | $ | 25,913 | |
Supplemental cash flow disclosure: | | | | | |
Cash paid for income taxes, net | $ | 9,501 | | | $ | 15,263 | | | $ | 10,417 | |
Cash paid for interest | $ | 3,002 | | | $ | 3,423 | | | $ | 3,022 | |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2020 Form 10-K | 35
Apple Inc.
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the “Company”). Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation.
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2020, 2019 and 2018 spanned 52 weeks each. An additional week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Common Stock Split
On August 28, 2020, the Company effected a four-for-one stock split to shareholders of record as of August 24, 2020. All share, restricted stock unit (“RSU”) and per share or per RSU information has been retroactively adjusted to reflect the stock split.
Recently Adopted Accounting Pronouncements
Leases
At the beginning of the first quarter of 2020, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), and additional ASUs issued to clarify and update the guidance in ASU 2016-02 (collectively, the “new leases standard”), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company adopted the new leases standard utilizing the modified retrospective transition method, under which amounts in prior periods presented were not restated. For contracts existing at the time of adoption, the Company elected to not reassess (i) whether any are or contain leases, (ii) lease classification, and (iii) initial direct costs. Upon adoption, the Company recorded $7.5 billion of right-of-use (“ROU”) assets and $8.1 billion of lease liabilities on its Condensed Consolidated Balance Sheet.
Hedging
At the beginning of the first quarter of 2020, the Company adopted FASB ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, eliminates the separate measurement and presentation of hedge ineffectiveness, and updates disclosure requirements related to hedging. The Company adopted ASU 2017-12 utilizing the modified retrospective transition method. Upon adoption, the Company recorded a $136 million increase in accumulated other comprehensive income/(loss) (“AOCI”) and a corresponding decrease in retained earnings in the Condensed Consolidated Statement of Shareholders’ Equity.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses.
Share-Based Compensation
The Company generally measures share-based compensation based on the closing price of the Company’s common stock on the date of grant, and recognizes expense on a straight-line basis for its estimate of equity awards that will ultimately vest. Further information regarding share-based compensation can be found in Note 9, “Benefit Plans.”
Apple Inc. | 2020 Form 10-K | 36
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for 2020, 2019 and 2018 (net income in millions and shares in thousands):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Numerator: | | | | | |
Net income | $ | 57,411 | | | $ | 55,256 | | | $ | 59,531 | |
| | | | | |
Denominator: | | | | | |
Weighted-average basic shares outstanding | 17,352,119 | | | 18,471,336 | | | 19,821,510 | |
Effect of dilutive securities | 176,095 | | | 124,315 | | | 178,925 | |
Weighted-average diluted shares | 17,528,214 | | | 18,595,651 | | | 20,000,435 | |
| | | | | |
Basic earnings per share | $ | 3.31 | | | $ | 2.99 | | | $ | 3.00 | |
Diluted earnings per share | $ | 3.28 | | | $ | 2.97 | | | $ | 2.98 | |
The Company applies the treasury stock method to determine the dilutive effect of potentially dilutive securities. Potentially dilutive securities representing 62 million shares of common stock were excluded from the computation of diluted earnings per share for 2019 because their effect would have been antidilutive.
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.
The Company’s investments in marketable debt securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Unrealized gains and losses on marketable debt securities classified as available-for-sale are recognized in other comprehensive income/(loss) (“OCI”).
The Company’s investments in marketable equity securities are classified based on the nature of the securities and their availability for use in current operations. The Company’s marketable equity securities are measured at fair value with gains and losses recognized in other income/(expense), net (“OI&E”).
The cost of securities sold is determined using the specific identification method.
Inventories
Inventories are measured using the first-in, first-out method.
Property, Plant and Equipment
Depreciation on property, plant and equipment is recognized on a straight-line basis over the estimated useful lives of the assets, which for buildings is the lesser of 40 years or the remaining life of the building; between one and five years for machinery and equipment, including product tooling and manufacturing process equipment; and the shorter of lease term or useful life for leasehold improvements. Capitalized costs related to internal-use software are amortized on a straight-line basis over the estimated useful lives of the assets, which range from three to seven years. Depreciation and amortization expense on property and equipment was $9.7 billion, $11.3 billion and $9.3 billion during 2020, 2019 and 2018, respectively.
Non-cash investing activities involving property, plant and equipment resulted in a net increase/(decrease) to accounts payable and other current liabilities of $(2.9) billion and $3.4 billion during 2019 and 2018, respectively.
Apple Inc. | 2020 Form 10-K | 37
Non-Marketable Securities
The Company has elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, the Company’s non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. Gains and losses on non-marketable equity securities are recognized in OI&E.
Restricted Cash and Restricted Marketable Securities
The Company considers cash and marketable securities to be restricted when withdrawal or general use is legally restricted. The Company reports restricted cash as other assets in the Consolidated Balance Sheets, and determines current or non-current classification based on the expected duration of the restriction. The Company reports restricted marketable securities as current or non-current marketable securities in the Consolidated Balance Sheets based on the classification of the underlying securities.
Fair Value Measurements
The fair values of the Company’s money market funds and certain marketable equity securities are based on quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, which generally have counterparties with high credit ratings, are based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.
Note 2 – Revenue Recognition
Net sales consist of revenue from the sale of iPhone, Mac, iPad, Services and other products. The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company’s Products net sales, control transfers when products are shipped. For the Company’s Services net sales, control transfers over time as services are delivered. Payment for Products and Services net sales is collected within a short period following transfer of control or commencement of delivery of services, as applicable.
The Company records reductions to Products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.
For arrangements with multiple performance obligations, which represent promises within an arrangement that are distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings, product-specific business objectives and the estimated cost to provide the performance obligation.
The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud, Siri and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided. Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.
For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized revenue, and has elected not to disclose amounts, related to these undelivered services.
Apple Inc. | 2020 Form 10-K | 38
For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product. For third-party applications sold through the App Store and certain digital content sold through the Company’s other digital content stores, the Company does not obtain control of the product before transferring it to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in Services net sales only the commission it retains.
The Company has elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.
Deferred Revenue
As of September 26, 2020 and September 28, 2019, the Company had total deferred revenue of $10.2 billion and $8.1 billion, respectively. As of September 26, 2020, the Company expects 65% of total deferred revenue to be realized in less than a year, 25% within one-to-two years, 8% within two-to-three years and 2% in greater than three years.
Disaggregated Revenue
Net sales disaggregated by significant products and services for 2020, 2019 and 2018 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
iPhone (1) | $ | 137,781 | | | $ | 142,381 | | | $ | 164,888 | |
Mac (1) | 28,622 | | | 25,740 | | | 25,198 | |
iPad (1) | 23,724 | | | 21,280 | | | 18,380 | |
Wearables, Home and Accessories (1)(2) | 30,620 | | | 24,482 | | | 17,381 | |
Services (3) | 53,768 | | | 46,291 | | | 39,748 | |
Total net sales (4) | $ | 274,515 | | | $ | 260,174 | | | $ | 265,595 | |
(1)Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.
(2)Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and Apple-branded and third-party accessories.
(3)Services net sales include sales from the Company’s advertising, AppleCare, digital content and other services. Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud storage and Apple TV+ services, which are bundled in the sales price of certain products.
(4)Includes $5.0 billion of revenue recognized in 2020 that was included in deferred revenue as of September 28, 2019, $5.9 billion of revenue recognized in 2019 that was included in deferred revenue as of September 29, 2018, and $5.8 billion of revenue recognized in 2018 that was included in deferred revenue as of September 30, 2017.
The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and Geographic Data” for 2020, 2019 and 2018.
Apple Inc. | 2020 Form 10-K | 39
Note 3 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash and marketable securities by significant investment category as of September 26, 2020 and September 28, 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Current Marketable Securities | | Non-Current Marketable Securities |
Cash | $ | 17,773 | | | $ | — | | | $ | — | | | $ | 17,773 | | | $ | 17,773 | | | $ | — | | | $ | — | |
Level 1 (1): | | | | | | | | | | | | | |
Money market funds | 2,171 | | | — | | | — | | | 2,171 | | | 2,171 | | | — | | | — | |
| | | | | | | | | | | | | |
Subtotal | 2,171 | | | — | | | — | | | 2,171 | | | 2,171 | | | — | | | — | |
Level 2 (2): | | | | | | | | | | | | | |
U.S. Treasury securities | 28,439 | | | 331 | | | — | | | 28,770 | | | 8,580 | | | 11,972 | | | 8,218 | |
U.S. agency securities | 8,604 | | | 8 | | | — | | | 8,612 | | | 2,009 | | | 3,078 | | | 3,525 | |
Non-U.S. government securities | 19,361 | | | 275 | | | (186) | | | 19,450 | | | 255 | | | 3,329 | | | 15,866 | |
Certificates of deposit and time deposits | 10,399 | | | — | | | — | | | 10,399 | | | 4,043 | | | 6,246 | | | 110 | |
Commercial paper | 11,226 | | | — | | | — | | | 11,226 | | | 3,185 | | | 8,041 | | | — | |
Corporate debt securities | 76,937 | | | 1,834 | | | (175) | | | 78,596 | | | — | | | 19,687 | | | 58,909 | |
Municipal securities | 1,001 | | | 22 | | | — | | | 1,023 | | | — | | | 139 | | | 884 | |
Mortgage- and asset-backed securities | 13,520 | | | 314 | | | (24) | | | 13,810 | | | — | | | 435 | | | 13,375 | |
Subtotal | 169,487 | | | 2,784 | | | (385) | | | 171,886 | | | 18,072 | | | 52,927 | | | 100,887 | |
Total (3) | $ | 189,431 | | | $ | 2,784 | | | $ | (385) | | | $ | 191,830 | | | $ | 38,016 | | | $ | 52,927 | | | $ | 100,887 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Current Marketable Securities | | Non-Current Marketable Securities |
Cash | $ | 12,204 | | | $ | — | | | $ | — | | | $ | 12,204 | | | $ | 12,204 | | | $ | — | | | $ | — | |
Level 1 (1): | | | | | | | | | | | | | |
Money market funds | 15,897 | | | — | | | — | | | 15,897 | | | 15,897 | | | — | | | — | |
| | | | | | | | | | | | | |
Subtotal | 15,897 | | | — | | | — | | | 15,897 | | | 15,897 | | | — | | | — | |
Level 2 (2): | | | | | | | | | | | | | |
U.S. Treasury securities | 30,293 | | | 33 | | | (62) | | | 30,264 | | | 6,165 | | | 9,817 | | | 14,282 | |
U.S. agency securities | 9,767 | | | 1 | | | (3) | | | 9,765 | | | 6,489 | | | 2,249 | | | 1,027 | |
Non-U.S. government securities | 19,821 | | | 337 | | | (50) | | | 20,108 | | | 749 | | | 3,168 | | | 16,191 | |
Certificates of deposit and time deposits | 4,041 | | | — | | | — | | | 4,041 | | | 2,024 | | | 1,922 | | | 95 | |
Commercial paper | 12,433 | | | — | | | — | | | 12,433 | | | 5,193 | | | 7,240 | | | — | |
Corporate debt securities | 85,383 | | | 756 | | | (92) | | | 86,047 | | | 123 | | | 26,127 | | | 59,797 | |
Municipal securities | 958 | | | 8 | | | (1) | | | 965 | | | — | | | 68 | | | 897 | |
Mortgage- and asset-backed securities | 14,180 | | | 67 | | | (73) | | | 14,174 | | | — | | | 1,122 | | | 13,052 | |
Subtotal | 176,876 | | | 1,202 | | | (281) | | | 177,797 | | | 20,743 | | | 51,713 | | | 105,341 | |
Total (3) | $ | 204,977 | | | $ | 1,202 | | | $ | (281) | | | $ | 205,898 | | | $ | 48,844 | | | $ | 51,713 | | | $ | 105,341 | |
(1)Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
(2)Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
(3)As of September 26, 2020 and September 28, 2019, total marketable securities included $18.6 billion and $18.9 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements.
Apple Inc. | 2020 Form 10-K | 40
The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. The maturities of the Company’s non-current marketable debt securities generally range from one to five years.
The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. When evaluating a marketable debt security for other-than-temporary impairment, the Company reviews factors such as the duration and extent to which the fair value of the security is less than its cost, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis. As of September 26, 2020, the Company does not consider any of its marketable debt securities to be other-than-temporarily impaired.
Non-Marketable Securities
The Company holds non-marketable equity securities of certain privately held companies without readily determinable fair values. As of September 26, 2020 and September 28, 2019, the Company’s non-marketable equity securities had a carrying value of $2.8 billion and $2.9 billion, respectively.
Restricted Cash
A reconciliation of the Company’s cash and cash equivalents in the Consolidated Balance Sheets to cash, cash equivalents and restricted cash in the Consolidated Statements of Cash Flows as of September 26, 2020 and September 28, 2019 is as follows (in millions):
| | | | | | | | | | | |
| 2020 | | 2019 |
| Cash and cash equivalents | $ | 38,016 | | | $ | 48,844 | |
| Restricted cash included in other current assets | 36 | | | 23 | |
| Restricted cash included in other non-current assets | 1,737 | | | 1,357 | |
| Cash, cash equivalents and restricted cash | $ | 39,789 | | | $ | 50,224 | |
The Company’s restricted cash primarily consisted of cash to support the Company’s iPhone Upgrade Program.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, net investments in certain foreign subsidiaries, and certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.
To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To protect the net investment in a foreign operation from fluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such as its foreign currency–denominated debt, as hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value. The Company may designate these instruments as either cash flow or fair value hedges. As of September 26, 2020, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 22 years.
The Company may also enter into non-designated foreign currency contracts to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
Apple Inc. | 2020 Form 10-K | 41
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. These instruments may offset a portion of the changes in interest income or expense, or changes in fair value. The Company designates these instruments as either cash flow or fair value hedges. As of September 26, 2020, the Company’s hedged interest rate transactions are expected to be recognized within seven years.
Cash Flow Hedges
Cash flow hedge amounts that are included in the assessment of hedge effectiveness are deferred in AOCI until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in OI&E in the same period as the related income or expense is recognized. For options designated as cash flow hedges, the time value is excluded from the assessment of hedge effectiveness and recognized in the financial statement line item to which the hedge relates on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into OI&E in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in OI&E unless they are re-designated as hedges of other transactions.
Net Investment Hedges
Net investment hedge amounts that are included in the assessment of hedge effectiveness are recorded in OCI as a part of the cumulative translation adjustment. For foreign exchange forward contracts designated as net investment hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OCI on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
Fair Value Hedges
Fair value hedge gains and losses related to amounts that are included in the assessment of hedge effectiveness are recognized in earnings along with a corresponding loss or gain related to the change in value of the hedged item in the same line in the Consolidated Statements of Operations. For foreign exchange forward contracts designated as fair value hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OI&E on a straight-line basis over the life of the hedge. Amounts excluded from the effectiveness assessment of fair value hedges and recognized in OI&E were gains of $465 million and $777 million for 2020 and 2019, respectively. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.
Non-Designated Derivatives
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
The Company records all derivatives in the Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value as of September 26, 2020 and September 28, 2019 (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 |
| Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value |
Derivative assets (1): | | | | | |
Foreign exchange contracts | $ | 749 | | | $ | 303 | | | $ | 1,052 | |
Interest rate contracts | $ | 1,557 | | | $ | — | | | $ | 1,557 | |
| | | | | |
Derivative liabilities (2): | | | | | |
Foreign exchange contracts | $ | 1,561 | | | $ | 485 | | | $ | 2,046 | |
| | | | | |
Apple Inc. | 2020 Form 10-K | 42
| | | | | | | | | | | | | | | | | |
| 2019 |
| Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value |
Derivative assets (1): | | | | | |
Foreign exchange contracts | $ | 1,798 | | | $ | 323 | | | $ | 2,121 | |
Interest rate contracts | $ | 685 | | | $ | — | | | $ | 685 | |
| | | | | |
Derivative liabilities (2): | | | | | |
Foreign exchange contracts | $ | 1,341 | | | $ | 160 | | | $ | 1,501 | |
Interest rate contracts | $ | 105 | | | $ | — | | | $ | 105 | |
(1)The fair value of derivative assets is measured using Level 2 fair value inputs and is included in other current assets and other non-current assets in the Consolidated Balance Sheets.
(2)The fair value of derivative liabilities is measured using Level 2 fair value inputs and is included in other current liabilities and other non-current liabilities in the Consolidated Balance Sheets.
The Company classifies cash flows related to derivative financial instruments as operating activities in its Consolidated Statements of Cash Flows.
The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow and fair value hedges in OCI and the Consolidated Statements of Operations for 2020, 2019 and 2018 (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Gains/(Losses) recognized in OCI – included in effectiveness assessment: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange contracts | $ | 365 | | | $ | (959) | | | $ | 682 | |
Interest rate contracts | (57) | | | — | | | 1 | |
Total | $ | 308 | | | $ | (959) | | | $ | 683 | |
| | | | | |
Net investment hedges: | | | | | |
Foreign currency debt | $ | 15 | | | $ | (58) | | | $ | 4 | |
| | | | | |
Gains/(Losses) reclassified from AOCI into net income – included in effectiveness assessment: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange contracts | $ | 1,553 | | | $ | (116) | | | $ | (482) | |
Interest rate contracts | (8) | | | (7) | | | 1 | |
Total | $ | 1,545 | | | $ | (123) | | | $ | (481) | |
The amount excluded from the effectiveness assessment of the Company’s hedges and recognized in OCI was a loss of $168 million for 2020.
Apple Inc. | 2020 Form 10-K | 43
The following tables show information about the Company’s derivative instruments designated as fair value hedges and the related hedged items for 2020, 2019 and 2018 and as of September 26, 2020 (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Gains/(Losses) on derivative instruments (1): | | | | | |
| Foreign exchange contracts | $ | (992) | | | $ | 1,020 | | | $ | (168) | |
| Interest rate contracts | 1,114 | | | 2,068 | | | (1,363) | |
| Total | $ | 122 | | | $ | 3,088 | | | $ | (1,531) | |
| | | | | |
Gains/(Losses) related to hedged items (1): | | | | | |
| Marketable securities | $ | 991 | | | $ | (1,018) | | | $ | 167 | |
| Fixed-rate debt | (1,114) | | | (2,068) | | | 1,363 | |
| Total | $ | (123) | | | $ | (3,086) | | | $ | 1,530 | |
| | | | | | | |
| 2020 | | |
| Carrying amounts of hedged assets/(liabilities): | | | |
Marketable securities (2) | $ | 16,270 | | | |
Fixed-rate debt (3) | $ | (21,033) | | | |
| | | |
| Cumulative hedging adjustments included in the carrying amounts of hedged items: | | | |
| Marketable securities carrying amount increases/(decreases) | $ | 493 | | | |
| Fixed-rate debt carrying amount (increases)/decreases | $ | (1,541) | | | |
(1)Gains and losses related to fair value hedges are included in OI&E in the Consolidated Statements of Operations.
(2)The carrying amounts of marketable securities that are designated as hedged items in fair value hedges are included in current marketable securities and non-current marketable securities in the Consolidated Balance Sheet.
(3)The carrying amounts of fixed-rate debt instruments that are designated as hedged items in fair value hedges are included in current term debt and non-current term debt in the Consolidated Balance Sheet.
The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 26, 2020 and September 28, 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| Notional Amount | | Credit Risk Amount | | Notional Amount | | Credit Risk Amount |
Instruments designated as accounting hedges: | | | | | | | |
Foreign exchange contracts | $ | 57,410 | | | $ | 749 | | | $ | 61,795 | | | $ | 1,798 | |
Interest rate contracts | $ | 20,700 | | | $ | 1,557 | | | $ | 31,250 | | | $ | 685 | |
| | | | | | | |
Instruments not designated as accounting hedges: | | | | | | | |
Foreign exchange contracts | $ | 88,636 | | | $ | 303 | | | $ | 76,868 | | | $ | 323 | |
The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
Apple Inc. | 2020 Form 10-K | 44
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. As of September 26, 2020 and September 28, 2019, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $875 million and $1.6 billion, respectively. The Company includes gross collateral posted and received in other current assets and other current liabilities in the Consolidated Balance Sheets, respectively.
Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. As of September 26, 2020 and September 28, 2019, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $2.8 billion and $2.7 billion, respectively, resulting in net derivative liabilities of $312 million and $407 million, respectively.
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of both September 26, 2020 and September 28, 2019, the Company had no customers that individually represented 10% or more of total trade receivables. The Company’s cellular network carriers accounted for 51% of total trade receivables as of September 28, 2019.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of September 26, 2020, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 57% and 11%. As of September 28, 2019, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 59% and 14%.
Note 4 – Consolidated Financial Statement Details
The following tables show the Company’s consolidated financial statement details as of September 26, 2020 and September 28, 2019 (in millions):
Property, Plant and Equipment, Net
| | | | | | | | | | | |
| 2020 | | 2019 |
Land and buildings | $ | 17,952 | | | $ | 17,085 | |
Machinery, equipment and internal-use software | 75,291 | | | 69,797 | |
Leasehold improvements | 10,283 | | | 9,075 | |
Gross property, plant and equipment | 103,526 | | | 95,957 | |
Accumulated depreciation and amortization | (66,760) | | | (58,579) | |
Total property, plant and equipment, net | $ | 36,766 | | | $ | 37,378 | |
Other Non-Current Liabilities
| | | | | | | | | | | |
| 2020 | | 2019 |
| Long-term taxes payable | $ | 28,170 | | | $ | 29,545 | |
Other non-current liabilities | 26,320 | | | 20,958 | |
Total other non-current liabilities | $ | 54,490 | | | $ | 50,503 | |
Apple Inc. | 2020 Form 10-K | 45
Other Income/(Expense), Net
The following table shows the detail of OI&E for 2020, 2019 and 2018 (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Interest and dividend income | $ | 3,763 | | | $ | 4,961 | | | $ | 5,686 | |
Interest expense | (2,873) | | | (3,576) | | | (3,240) | |
| Other income/(expense), net | (87) | | | 422 | | | (441) | |
Total other income/(expense), net | $ | 803 | | | $ | 1,807 | | | $ | 2,005 | |
Note 5 – Income Taxes
U.S. Tax Cuts and Jobs Act
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain foreign earnings, for which the Company has elected to record certain deferred tax assets and liabilities.
Provision for Income Taxes and Effective Tax Rate
The provision for income taxes for 2020, 2019 and 2018, consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Federal: | | | | | |
Current | $ | 6,306 | | | $ | 6,384 | | | $ | 41,425 | |
Deferred | (3,619) | | | (2,939) | | | (33,819) | |
Total | 2,687 | | | 3,445 | | | 7,606 | |
State: | | | | | |
Current | 455 | | | 475 | | | 551 | |
Deferred | 21 | | | (67) | | | 48 | |
Total | 476 | | | 408 | | | 599 | |
Foreign: | | | | | |
Current | 3,134 | | | 3,962 | | | 3,986 | |
Deferred | 3,383 | | | 2,666 | | | 1,181 | |
Total | 6,517 | | | 6,628 | | | 5,167 | |
Provision for income taxes | $ | 9,680 | | | $ | 10,481 | | | $ | 13,372 | |
The foreign provision for income taxes is based on foreign pre-tax earnings of $38.1 billion, $44.3 billion and $48.0 billion in 2020, 2019 and 2018, respectively.
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (21% in 2020 and 2019; 24.5% in 2018) to income before provision for income taxes for 2020, 2019 and 2018, is as follows (dollars in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Computed expected tax | $ | 14,089 | | | $ | 13,805 | | | $ | 17,890 | |
State taxes, net of federal effect | 423 | | | 423 | | | 271 | |
| Impacts of the Act | (582) | | | — | | | 1,515 | |
| Earnings of foreign subsidiaries | (2,534) | | | (2,625) | | | (5,606) | |
Research and development credit, net | (728) | | | (548) | | | (560) | |
Excess tax benefits from equity awards | (930) | | | (639) | | | (675) | |
Other | (58) | | | 65 | | | 537 | |
Provision for income taxes | $ | 9,680 | | | $ | 10,481 | | | $ | 13,372 | |
Effective tax rate | 14.4 | % | | 15.9 | % | | 18.3 | % |
Apple Inc. | 2020 Form 10-K | 46
Deferred Tax Assets and Liabilities
As of September 26, 2020 and September 28, 2019, the significant components of the Company’s deferred tax assets and liabilities were (in millions):
| | | | | | | | | | | |
| 2020 | | 2019 |
Deferred tax assets: | | | |
Amortization and depreciation | $ | 8,317 | | | $ | 11,645 | |
Accrued liabilities and other reserves | 4,934 | | | 5,196 | |
| Lease liabilities | 2,038 | | | — | |
Deferred revenue | 1,638 | | | 1,372 | |
Other | 2,409 | | | 2,174 | |
| Total deferred tax assets | 19,336 | | | 20,387 | |
| Less: Valuation allowance | (1,041) | | | (747) | |
Total deferred tax assets, net | 18,295 | | | 19,640 | |
Deferred tax liabilities: | | | |
Minimum tax on foreign earnings | 7,045 | | | 10,809 | |
| Right-of-use assets | 1,862 | | | — | |
| Unrealized gains | 526 | | | 186 | |
Other | 705 | | | 600 | |
Total deferred tax liabilities | 10,138 | | | 11,595 | |
| Net deferred tax assets | $ | 8,157 | | | $ | 8,045 | |
Deferred tax assets and liabilities reflect the effects of tax credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Uncertain Tax Positions
As of September 26, 2020, the total amount of gross unrecognized tax benefits was $16.5 billion, of which $8.8 billion, if recognized, would impact the Company’s effective tax rate. As of September 28, 2019, the total amount of gross unrecognized tax benefits was $15.6 billion, of which $8.6 billion, if recognized, would have impacted the Company’s effective tax rate.
The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2020, 2019 and 2018, is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Beginning balances | $ | 15,619 | | | $ | 9,694 | | | $ | 8,407 | |
Increases related to tax positions taken during a prior year | 454 | | | 5,845 | | | 2,431 | |
Decreases related to tax positions taken during a prior year | (791) | | | (686) | | | (2,212) | |
Increases related to tax positions taken during the current year | 1,347 | | | 1,697 | | | 1,824 | |
Decreases related to settlements with taxing authorities | (85) | | | (852) | | | (756) | |
Decreases related to expiration of the statute of limitations | (69) | | | (79) | | | — | |
Ending balances | $ | 16,475 | | | $ | 15,619 | | | $ | 9,694 | |
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. The U.S. Internal Revenue Service (the “IRS”) concluded its review of the years 2013 through 2015 in 2018, and all years before 2016 are closed. Tax years after 2014 remain open in certain major foreign jurisdictions and are subject to examination by the taxing authorities. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although the timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease in the next 12 months by as much as $3.9 billion.
Apple Inc. | 2020 Form 10-K | 47
Interest and Penalties
The Company includes interest and penalties related to income tax matters within the provision for income taxes. As of September 26, 2020 and September 28, 2019, the total amount of gross interest and penalties accrued was $1.4 billion and $1.3 billion, respectively. The Company recognized interest and penalty expense in 2020, 2019 and 2018 of $85 million, $73 million and $489 million, respectively.
European Commission State Aid Decision
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. The Company and Ireland appealed the State Aid Decision to the General Court of the Court of Justice of the European Union (the “General Court”). On July 15, 2020, the General Court annulled the State Aid Decision. On September 25, 2020, the European Commission appealed the General Court’s decision to the European Court of Justice. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the Act.
On an annual basis, the Company may request approval from the Irish Minister for Finance to reduce the recovery amount for certain taxes paid to other countries. As of September 26, 2020, the adjusted recovery amount was €12.9 billion, excluding interest. The adjusted recovery amount plus interest is funded into escrow, where it will remain restricted from general use pending the conclusion of all legal proceedings. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.
Note 6 – Debt
Commercial Paper and Repurchase Agreements
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 26, 2020 and September 28, 2019, the Company had $5.0 billion and $6.0 billion of Commercial Paper outstanding, respectively, with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 0.62% and 2.24% as of September 26, 2020 and September 28, 2019, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2020, 2019 and 2018 (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Maturities 90 days or less: | | | | | |
| Proceeds from/(Repayments of) commercial paper, net | $ | 100 | | | $ | (3,248) | | | $ | 1,044 | |
| | | | | |
Maturities greater than 90 days: | | | | | |
Proceeds from commercial paper | 6,185 | | | 13,874 | | | 14,555 | |
Repayments of commercial paper | (7,248) | | | (16,603) | | | (15,636) | |
| Repayments of commercial paper, net | (1,063) | | | (2,729) | | | (1,081) | |
| | | | | |
| Total repayments of commercial paper, net | $ | (963) | | | $ | (5,977) | | | $ | (37) | |
In 2020, the Company entered into agreements to sell certain of its marketable securities with a promise to repurchase the securities at a specified time and amount (“Repos”). Due to the Company’s continuing involvement with the marketable securities, the Company accounted for its Repos as collateralized borrowings. The Company entered into $5.2 billion of Repos during 2020, all of which had been settled as of September 26, 2020.
Apple Inc. | 2020 Form 10-K | 48
Term Debt
As of September 26, 2020, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $106.1 billion (collectively the “Notes”). The Notes are senior unsecured obligations and interest is payable in arrears. The following table provides a summary of the Company’s term debt as of September 26, 2020 and September 28, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturities (calendar year) | | 2020 | | 2019 |
| Amount (in millions) | | Effective Interest Rate | | Amount (in millions) | | Effective Interest Rate |
| 2013 – 2019 debt issuances: | | | | | | | | | |
Floating-rate notes | 2021 – 2022 | | $ | 2,250 | | | 0.60% – 1.39% | | $ | 4,250 | | | 2.25% – 3.28% |
Fixed-rate 0.375% – 4.650% notes | 2020 – 2049 | | 87,487 | | | 0.28% – 4.78% | | 97,429 | | | 0.28% – 4.78% |
| | | | | | | | | |
First quarter 2020 debt issuance of €2.0 billion: | | | | | | | | | |
Fixed-rate 0.000% – 0.500% notes | 2025 – 2031 | | 2,341 | | | 0.03% – 0.56% | | — | | | — | % |
| | | | | | | | | |
Third quarter 2020 debt issuance of $8.5 billion: | | | | | | | | | |
Fixed-rate 0.750% – 2.650% notes | 2023 – 2050 | | 8,500 | | | 0.84% – 2.72% | | — | | | — | % |
| | | | | | | | | |
Fourth quarter 2020 debt issuance of $5.5 billion: | | | | | | | | | |
Fixed-rate 0.550% – 2.550% notes | 2025 – 2060 | | 5,500 | | | 0.60% – 2.59% | | — | | | — | % |
| Total term debt | | | 106,078 | | | | | 101,679 | | | |
| | | | | | | | | |
Unamortized premium/(discount) and issuance costs, net | | | (314) | | | | | (224) | | | |
| Hedge accounting fair value adjustments | | | 1,676 | | | | | 612 | | | |
| Less: Current portion of term debt | | | (8,773) | | | | | (10,260) | | | |
| Total non-current portion of term debt | | | $ | 98,667 | | | | | $ | 91,807 | | | |
To manage interest rate risk on certain of its U.S. dollar–denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.
As of September 28, 2019, a portion of the Company’s Japanese yen–denominated notes with a carrying value of $1.0 billion was designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation. The Company’s Japanese yen–denominated notes matured during 2020 and the associated net investment hedges were terminated. For further discussion regarding the Company’s use of derivative instruments, refer to the Derivative Financial Instruments section of Note 3, “Financial Instruments.”
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to hedging. The Company recognized $2.8 billion, $3.2 billion and $3.0 billion of interest cost on its term debt for 2020, 2019 and 2018, respectively.
The future principal payments for the Company’s Notes as of September 26, 2020, are as follows (in millions):
| | | | | |
| 2021 | $ | 8,750 | |
| 2022 | 9,569 | |
| 2023 | 11,389 | |
| 2024 | 10,115 | |
| 2025 | 10,914 | |
| Thereafter | 55,341 | |
| Total term debt | $ | 106,078 | |
As of September 26, 2020 and September 28, 2019, the fair value of the Company’s Notes, based on Level 2 inputs, was $117.1 billion and $107.5 billion, respectively.
Apple Inc. | 2020 Form 10-K | 49
Note 7 – Shareholders’ Equity
Share Repurchase Program
As of September 26, 2020, the Company was authorized to purchase up to $225 billion of the Company’s common stock under a share repurchase program, of which $168.6 billion had been utilized. During 2020, the Company repurchased 917 million shares of its common stock for $72.5 billion, including 141 million shares delivered under a $10.0 billion November 2019 accelerated share repurchase arrangement (“ASR”) and 64 million shares delivered under a $6.0 billion May 2020 ASR. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Shares of Common Stock
The following table shows the changes in shares of common stock for 2020, 2019 and 2018 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Common stock outstanding, beginning balances | 17,772,945 | | | 19,019,943 | | | 20,504,805 | |
Common stock repurchased | (917,270) | | | (1,380,819) | | | (1,622,198) | |
Common stock issued, net of shares withheld for employee taxes | 121,088 | | | 133,821 | | | 137,336 | |
Common stock outstanding, ending balances | 16,976,763 | | | 17,772,945 | | | 19,019,943 | |
Note 8 – Comprehensive Income
The Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on marketable debt securities classified as available-for-sale.
The following table shows the pre-tax amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial statement line items, for 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income Components | | Financial Statement Line Items | | 2020 | | 2019 |
Unrealized (gains)/losses on derivative instruments: | | | | | | |
Foreign exchange contracts | | Total net sales | | $ | (365) | | | $ | (206) | |
| | Total cost of sales | | (584) | | | (482) | |
| | Other income/(expense), net | | (604) | | | 784 | |
Interest rate contracts | | Other income/(expense), net | | 8 | | | 7 | |
| | | | (1,545) | | | 103 | |
Unrealized (gains)/losses on marketable debt securities | | Other income/(expense), net | | (82) | | | 31 | |
Total amounts reclassified from AOCI | | | | $ | (1,627) | | | $ | 134 | |
Apple Inc. | 2020 Form 10-K | 50
The following table shows the changes in AOCI by component for 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Foreign Currency Translation | | Unrealized Gains/Losses on Derivative Instruments | | Unrealized Gains/Losses on Marketable Debt Securities | | Total |
| Balances as of September 29, 2018 | $ | (1,055) | | | $ | 810 | | | $ | (3,209) | | | $ | (3,454) | |
Other comprehensive income/(loss) before reclassifications | (421) | | | (949) | | | 4,854 | | | 3,484 | |
Amounts reclassified from AOCI | — | | | 103 | | | 31 | | | 134 | |
Tax effect | 13 | | | 208 | | | (1,058) | | | (837) | |
Other comprehensive income/(loss) | (408) | | | (638) | | | 3,827 | | | 2,781 | |
| Cumulative effect of change in accounting principle | — | | | — | | | 89 | | | 89 | |
| Balances as of September 28, 2019 | (1,463) | | | 172 | | | 707 | | | (584) | |
Other comprehensive income/(loss) before reclassifications | 91 | | | 115 | | | 1,560 | | | 1,766 | |
Amounts reclassified from AOCI | — | | | (1,545) | | | (82) | | | (1,627) | |
Tax effect | (3) | | | 245 | | | (339) | | | (97) | |
Other comprehensive income/(loss) | 88 | | | (1,185) | | | 1,139 | | | 42 | |
Cumulative effect of change in accounting principle (1) | — | | | 136 | | | — | | | 136 | |
| Balances as of September 26, 2020 | $ | (1,375) | | | $ | (877) | | | $ | 1,846 | | | $ | (406) | |
(1)Refer to Note 1, “Summary of Significant Accounting Policies” for more information on the Company’s adoption of ASU 2017-12 in 2020.
Note 9 – Benefit Plans
2014 Employee Stock Plan
In the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the “2014 Plan”) and terminated the Company’s authority to grant new awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of RSUs, stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards. RSUs granted under the 2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. RSUs granted under the 2014 Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the 2014 Plan utilizing a factor of two times the number of RSUs canceled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 1.54 billion shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares subject to outstanding awards under the 2003 Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations for RSUs, will also be available for awards under the 2014 Plan. As of September 26, 2020, approximately 808 million shares were reserved for future issuance under the 2014 Plan.
Apple Inc. Non-Employee Director Stock Plan
The Apple Inc. Non-Employee Director Stock Plan (the “Director Plan”) is a shareholder-approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the value and relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants, in each case within the limits set forth in the Director Plan and without further shareholder approval. RSUs granted under the Director Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. The Director Plan expires on November 12, 2027. All RSUs granted under the Director Plan are entitled to DERs. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. As of September 26, 2020, approximately 4 million shares were reserved for future issuance under the Director Plan.
Apple Inc. | 2020 Form 10-K | 51
Rule 10b5-1 Trading Plans
During the three months ended September 26, 2020, Section 16 officers Katherine L. Adams, Timothy D. Cook, Chris Kondo, Luca Maestri, Deirdre O’Brien and Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired under the Company’s employee and director equity plans.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder-approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 26, 2020, approximately 107 million shares were reserved for future issuance under the Purchase Plan.
401(k) Plan
The Company’s 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($19,500 for calendar year 2020). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum of 6% of the employee’s eligible earnings.
Restricted Stock Units
A summary of the Company’s RSU activity and related information for 2020, 2019 and 2018, is as follows:
| | | | | | | | | | | | | | | | | |
| Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value Per RSU | | Aggregate Fair Value (in millions) |
| Balance as of September 30, 2017 | 390,284 | | | $ | 27.58 | | | |
RSUs granted | 181,402 | | | $ | 40.72 | | | |
RSUs vested | (178,873) | | | $ | 27.81 | | | |
RSUs canceled | (24,195) | | | $ | 31.95 | | | |
| Balance as of September 29, 2018 | 368,618 | | | $ | 33.65 | | | |
RSUs granted | 147,409 | | | $ | 53.99 | | | |
RSUs vested | (168,350) | | | $ | 33.80 | | | |
RSUs canceled | (21,609) | | | $ | 40.71 | | | |
| Balance as of September 28, 2019 | 326,068 | | | $ | 42.30 | | | |
RSUs granted | 156,800 | | | $ | 59.20 | | | |
RSUs vested | (157,743) | | | $ | 40.29 | | | |
RSUs canceled | (14,347) | | | $ | 48.07 | | | |
| Balance as of September 26, 2020 | 310,778 | | | $ | 51.58 | | | $ | 34,894 | |
The fair value as of the respective vesting dates of RSUs was $10.8 billion, $8.6 billion and $7.6 billion for 2020, 2019 and 2018, respectively. The majority of RSUs that vested in 2020, 2019 and 2018 were net share settled such that the Company withheld shares with a value equivalent to the employees’ obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 56 million, 59 million and 64 million for 2020, 2019 and 2018, respectively, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $3.9 billion, $3.0 billion and $2.7 billion in 2020, 2019 and 2018, respectively.
Apple Inc. | 2020 Form 10-K | 52
Share-Based Compensation
The following table shows share-based compensation expense and the related income tax benefit included in the Consolidated Statements of Operations for 2020, 2019 and 2018 (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Share-based compensation expense | $ | 6,829 | | | $ | 6,068 | | | $ | 5,340 | |
Income tax benefit related to share-based compensation expense | $ | (2,476) | | | $ | (1,967) | | | $ | (1,893) | |
As of September 26, 2020, the total unrecognized compensation cost related to outstanding RSUs and stock options was $12.2 billion, which the Company expects to recognize over a weighted-average period of 2.6 years.
Note 10 – Commitments and Contingencies
Accrued Warranty and Guarantees
The following table shows changes in the Company’s accrued warranties and related costs for 2020, 2019 and 2018 (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Beginning accrued warranty and related costs | $ | 3,570 | | | $ | 3,692 | | | $ | 3,834 | |
Cost of warranty claims | (2,956) | | | (3,857) | | | (4,115) | |
Accruals for product warranty | 2,740 | | | 3,735 | | | 3,973 | |
Ending accrued warranty and related costs | $ | 3,354 | | | $ | 3,570 | | | $ | 3,692 | |
The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and China mainland. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within net sales.
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. The Company also competes for various components with other participants in the markets for smartphones, personal computers, tablets and other electronic devices. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacities have increased. The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.
The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland.
Apple Inc. | 2020 Form 10-K | 53
Unconditional Purchase Obligations
The Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for supplier arrangements, Internet and telecommunication services, intellectual property licenses and content creation. Future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year as of September 26, 2020, are as follows (in millions):
| | | | | |
| 2021 | $ | 3,476 | |
| 2022 | 2,885 | |
| 2023 | 1,700 | |
| 2024 | 357 | |
| 2025 | 104 | |
| Thereafter | 130 | |
| Total | $ | 8,652 | |
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully resolved. The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims, except for the following matters:
VirnetX
VirnetX, Inc. (“VirnetX”) filed a lawsuit against the Company alleging that certain of the Company’s products infringe on patents owned by VirnetX. On April 11, 2018, a jury returned a verdict against the Company and awarded damages of $503 million. The Company appealed the verdict to the U.S. Court of Appeals for the Federal Circuit, which remanded the case back to the U.S. District Court for the Eastern District of Texas, where it is scheduled for a re-trial in October 2020. The Company has challenged the validity of the patents at issue in the re-trial at the U.S. Patent and Trademark Office (the “PTO”), and the PTO has declared the patents invalid, subject to further appeal by VirnetX.
iOS Performance Management Cases
Various civil litigation matters have been filed in state and federal courts in the U.S. and in various international jurisdictions alleging violation of consumer protection laws, fraud, computer intrusion and other causes of action related to the Company’s performance management feature used in its iPhone operating systems, introduced to certain iPhones in iOS updates 10.2.1 and 11.2. The claims seek monetary damages and other non-monetary relief. On April 5, 2018, several U.S. federal actions were consolidated through a Multidistrict Litigation process into a single action in the U.S. District Court for the Northern District of California (the “Northern California District Court”). On February 28, 2020, the parties in the Multidistrict Litigation reached a settlement to resolve the U.S. federal and California state class actions. Under the terms of the settlement, which the Northern California District Court preliminarily approved in May 2020, the Company has agreed to pay up to $500 million in the aggregate to certain U.S. owners of iPhones if certain conditions are met. The final amount of the settlement will be determined based on the number of consumers who file valid claims and the attorneys’ fee award. However, the Company has agreed to pay at least $310 million to settle the claims. In addition to civil litigation, the Company is also responding to governmental investigations and requests for information relating to the performance management feature. The Company continues to believe that its iPhones were not defective, that the performance management feature introduced with iOS updates 10.2.1 and 11.2 was intended to, and did, improve customers’ user experience, and that the Company did not make any misleading statements or fail to disclose any material information. The Company has accrued its best estimate for the ultimate resolution of these matters.
French Competition Authority
On March 16, 2020, the French Competition Authority (“FCA”) announced its decision that aspects of the Company’s sales and distribution practices in France violate French competition law, and issued a fine of €1.1 billion. The Company strongly disagrees with the FCA’s decision, and has appealed.
Apple Inc. | 2020 Form 10-K | 54
Optis
Optis Wireless Technology, LLC and related entities (“Optis”) filed a lawsuit in the U.S. District Court for the Eastern District of Texas against the Company alleging that certain of the Company’s products infringe on patents owned by Optis. On August 11, 2020, a jury returned a verdict against the Company and awarded damages of $506 million. The Company has asked the court to set aside the verdict, where the case remains pending.
Note 11 – Segment Information and Geographic Data
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China mainland, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.”
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
The following table shows information by reportable segment for 2020, 2019 and 2018 (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Americas: | | | | | |
Net sales | $ | 124,556 | | | $ | 116,914 | | | $ | 112,093 | |
Operating income | $ | 37,722 | | | $ | 35,099 | | | $ | 34,864 | |
| | | | | |
Europe: | | | | | |
Net sales | $ | 68,640 | | | $ | 60,288 | | | $ | 62,420 | |
Operating income | $ | 22,170 | | | $ | 19,195 | | | $ | 19,955 | |
| | | | | |
| Greater China: | | | | | |
Net sales | $ | 40,308 | | | $ | 43,678 | | | $ | 51,942 | |
Operating income | $ | 15,261 | | | $ | 16,232 | | | $ | 19,742 | |
| | | | | |
Japan: | | | | | |
Net sales | $ | 21,418 | | | $ | 21,506 | | | $ | 21,733 | |
Operating income | $ | 9,279 | | | $ | 9,369 | | | $ | 9,500 | |
| | | | | |
Rest of Asia Pacific: | | | | | |
Net sales | $ | 19,593 | | | $ | 17,788 | | | $ | 17,407 | |
Operating income | $ | 6,808 | | | $ | 6,055 | | | $ | 6,181 | |
Apple Inc. | 2020 Form 10-K | 55
A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for 2020, 2019 and 2018 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Segment operating income | $ | 91,240 | | | $ | 85,950 | | | $ | 90,242 | |
Research and development expense | (18,752) | | | (16,217) | | | (14,236) | |
Other corporate expenses, net | (6,200) | | | (5,803) | | | (5,108) | |
Total operating income | $ | 66,288 | | | $ | 63,930 | | | $ | 70,898 | |
The U.S. and China were the only countries that accounted for more than 10% of the Company’s net sales in 2020, 2019 and 2018. There was no single customer that accounted for more than 10% of net sales in 2020, 2019 and 2018. Net sales for 2020, 2019 and 2018 and long-lived assets as of September 26, 2020 and September 28, 2019 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Net sales: | | | | | |
| U.S. | $ | 109,197 | | | $ | 102,266 | | | $ | 98,061 | |
China (1) | 40,308 | | | 43,678 | | | 51,942 | |
Other countries | 125,010 | | | 114,230 | | | 115,592 | |
Total net sales | $ | 274,515 | | | $ | 260,174 | | | $ | 265,595 | |
| | | | | | | | | | | |
| 2020 | | 2019 |
Long-lived assets: | | | |
| U.S. | $ | 25,890 | | | $ | 24,711 | |
China (1) | 7,256 | | | 9,064 | |
Other countries | 3,620 | | | 3,603 | |
Total long-lived assets | $ | 36,766 | | | $ | 37,378 | |
(1)China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets related to retail stores and related infrastructure.
Note 12 – Leases
The Company has lease arrangements for certain equipment and facilities, including retail, corporate, manufacturing and data center space. These leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options, some of which are reasonably certain of exercise. The Company’s lease arrangements may contain both lease and non-lease components. The Company has elected to combine and account for lease and non-lease components as a single lease component for leases of retail, corporate, and data center facilities.
Payments under the Company’s lease arrangements may be fixed or variable, and variable lease payments are primarily based on purchases of output of the underlying leased assets. Lease costs associated with fixed payments on the Company’s operating leases were $1.5 billion for 2020. Lease costs associated with variable payments on the Company’s leases were $9.3 billion for 2020. Rent expense for operating leases, as previously reported under former lease accounting standards, was $1.3 billion and $1.2 billion in 2019 and 2018, respectively.
For 2020, the Company made $1.5 billion of fixed cash payments related to operating leases. Non-cash activities involving ROU assets obtained in exchange for lease liabilities were $10.5 billion for 2020, including the impact of adopting the new leases standard in the first quarter of 2020.
Apple Inc. | 2020 Form 10-K | 56
The following table shows ROU assets and lease liabilities, and the associated financial statement line items, as of September 26, 2020 (in millions):
| | | | | | | | | | | | | | | | |
| Lease-Related Assets and Liabilities | | Financial Statement Line Items | | 2020 | | |
Right-of-use assets: | | | | | | |
| Operating leases | | Other non-current assets | | $ | 8,570 | | | |
| Finance leases | | Property, plant and equipment, net | | 629 | | | |
| Total right-of-use assets | | | | $ | 9,199 | | | |
| | | | | | |
Lease liabilities: | | | | | | |
| Operating leases | | Other current liabilities | | $ | 1,436 | | | |
| | Other non-current liabilities | | 7,745 | | | |
| Finance leases | | Other current liabilities | | 24 | | | |
| | Other non-current liabilities | | 637 | | | |
| Total lease liabilities | | | | $ | 9,842 | | | |
Lease liability maturities as of September 26, 2020, are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
| 2021 | $ | 1,493 | | | $ | 43 | | | $ | 1,536 | |
| 2022 | 1,461 | | | 43 | | | 1,504 | |
| 2023 | 1,317 | | | 54 | | | 1,371 | |
| 2024 | 1,068 | | | 30 | | | 1,098 | |
| 2025 | 960 | | | 25 | | | 985 | |
| Thereafter | 3,845 | | | 895 | | | 4,740 | |
| Total undiscounted liabilities | 10,144 | | | 1,090 | | | 11,234 | |
| Less: Imputed interest | (963) | | | (429) | | | (1,392) | |
| Total lease liabilities | $ | 9,181 | | | $ | 661 | | | $ | 9,842 | |
The weighted-average remaining lease term and discount rate related to the Company’s lease liabilities as of September 26, 2020 were 10.3 years and 2.0%, respectively. The discount rates are generally based on estimates of the Company’s incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined.
As of September 26, 2020, the Company had $1.7 billion of future payments under additional leases, primarily for corporate facilities and retail space, that had not yet commenced. These leases will commence between 2021 and 2022, with lease terms ranging from 1 year to 20 years.
Note 13 – Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Company’s quarterly financial information for each of the four quarters of 2020 and 2019 (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
| 2020: | | | | | | | |
Total net sales | $ | 64,698 | | | $ | 59,685 | | | $ | 58,313 | | | $ | 91,819 | |
Gross margin | $ | 24,689 | | | $ | 22,680 | | | $ | 22,370 | | | $ | 35,217 | |
Net income | $ | 12,673 | | | $ | 11,253 | | | $ | 11,249 | | | $ | 22,236 | |
| | | | | | | |
Earnings per share (1): | | | | | | | |
| Basic | $ | 0.74 | | | $ | 0.65 | | | $ | 0.64 | | | $ | 1.26 | |
| Diluted | $ | 0.73 | | | $ | 0.65 | | | $ | 0.64 | | | $ | 1.25 | |
Apple Inc. | 2020 Form 10-K | 57
| | | | | | | | | | | | | | | | | | | | | | | |
| Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
| 2019: | | | | | | | |
Total net sales | $ | 64,040 | | | $ | 53,809 | | | $ | 58,015 | | | $ | 84,310 | |
Gross margin | $ | 24,313 | | | $ | 20,227 | | | $ | 21,821 | | | $ | 32,031 | |
Net income | $ | 13,686 | | | $ | 10,044 | | | $ | 11,561 | | | $ | 19,965 | |
| | | | | | | |
Earnings per share (1): | | | | | | | |
Basic | $ | 0.76 | | | $ | 0.55 | | | $ | 0.62 | | | $ | 1.05 | |
Diluted | $ | 0.76 | | | $ | 0.55 | | | $ | 0.61 | | | $ | 1.05 | |
(1)Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
Apple Inc. | 2020 Form 10-K | 58
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 26, 2020 and September 28, 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 26, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Apple Inc. at September 26, 2020 and September 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 26, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), Apple Inc.’s internal control over financial reporting as of September 26, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 29, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of Apple Inc.’s management. Our responsibility is to express an opinion on Apple Inc.’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
| | | | | |
| Uncertain Tax Positions |
| Description of the Matter | As discussed in Note 5 to the financial statements, Apple Inc. is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. As of September 26, 2020, the total amount of gross unrecognized tax benefits was $16.5 billion, of which $8.8 billion, if recognized, would impact Apple Inc.’s effective tax rate. Apple Inc. uses significant judgment in the calculation of tax liabilities in estimating the impact of uncertainties in the application of technical merits and complex tax laws. Auditing management’s evaluation of whether an uncertain tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex, involves significant judgment, and is based on interpretations of tax laws and legal rulings. |
Apple Inc. | 2020 Form 10-K | 59
| | | | | |
How We Addressed the Matter in Our Audit | We tested controls relating to the evaluation of uncertain tax positions, including controls over management’s assessment as to whether tax positions are more likely than not to be sustained, management’s process to measure the benefit of its tax positions, and the development of the related disclosures. To evaluate Apple Inc.’s assessment of which tax positions are more likely than not to be sustained, our audit procedures included, among others, reading and evaluating management’s assumptions and analysis, and, as applicable, Apple Inc.’s communications with taxing authorities, that detailed the basis and technical merits of the uncertain tax positions. We involved our tax subject matter resources in assessing the technical merits of certain of Apple Inc.’s tax positions based on our knowledge of relevant tax laws and experience with related taxing authorities. For certain tax positions, we also received external legal counsel confirmation letters and discussed the matters with external advisors and Apple Inc. tax personnel. In addition, we evaluated Apple Inc.’s disclosure in relation to these matters included in Note 5 to the financial statements. |
/s/ Ernst & Young LLP
We have served as Apple Inc.’s auditor since 2009.
San Jose, California
October 29, 2020
Apple Inc. | 2020 Form 10-K | 60
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Apple Inc.’s internal control over financial reporting as of September 26, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 26, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of Apple Inc. as of September 26, 2020 and September 28, 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 26, 2020, and the related notes and our report dated October 29, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
Apple Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Apple Inc.’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
October 29, 2020
Apple Inc. | 2020 Form 10-K | 61
Item 8.Financial Statements and Supplementary Data | |
| | |
Index to Consolidated Financial Statements | | Page |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes.
Apple Inc. | 2019 Form 10-K | 28
Apple Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
|
| | | | | | | | | | | |
| Years ended |
| September 28, 2019 | | September 29, 2018 | | September 30, 2017 |
Net sales: | | | | | |
Products | $ | 213,883 |
| | $ | 225,847 |
| | $ | 196,534 |
|
Services | 46,291 |
| | 39,748 |
| | 32,700 |
|
Total net sales | 260,174 |
| | 265,595 |
| | 229,234 |
|
| | | | | |
Cost of sales: | | | | | |
Products | 144,996 |
| | 148,164 |
| | 126,337 |
|
Services | 16,786 |
| | 15,592 |
| | 14,711 |
|
Total cost of sales | 161,782 |
| | 163,756 |
| | 141,048 |
|
Gross margin | 98,392 |
|
| 101,839 |
|
| 88,186 |
|
| | | | | |
Operating expenses: | | | | | |
Research and development | 16,217 |
| | 14,236 |
| | 11,581 |
|
Selling, general and administrative | 18,245 |
| | 16,705 |
| | 15,261 |
|
Total operating expenses | 34,462 |
|
| 30,941 |
|
| 26,842 |
|
| | | | | |
Operating income | 63,930 |
| | 70,898 |
| | 61,344 |
|
Other income/(expense), net | 1,807 |
| | 2,005 |
| | 2,745 |
|
Income before provision for income taxes | 65,737 |
|
| 72,903 |
|
| 64,089 |
|
Provision for income taxes | 10,481 |
| | 13,372 |
| | 15,738 |
|
Net income | $ | 55,256 |
|
| $ | 59,531 |
|
| $ | 48,351 |
|
| | | | | |
Earnings per share: | | | | | |
Basic | $ | 11.97 |
| | $ | 12.01 |
| | $ | 9.27 |
|
Diluted | $ | 11.89 |
| | $ | 11.91 |
| | $ | 9.21 |
|
| | | | | |
Shares used in computing earnings per share: | | | | | |
Basic | 4,617,834 |
| | 4,955,377 |
| | 5,217,242 |
|
Diluted | 4,648,913 |
| | 5,000,109 |
| | 5,251,692 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 29
Apple Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
| | | | | | | | | | | |
| Years ended |
| September 28, 2019 | | September 29, 2018 | | September 30, 2017 |
Net income | $ | 55,256 |
| | $ | 59,531 |
| | $ | 48,351 |
|
Other comprehensive income/(loss): | | | | | |
Change in foreign currency translation, net of tax | (408 | ) | | (525 | ) | | 224 |
|
| | | | | |
Change in unrealized gains/losses on derivative instruments, net of tax: | | | | | |
Change in fair value of derivatives | (661 | ) | | 523 |
| | 1,315 |
|
Adjustment for net (gains)/losses realized and included in net income | 23 |
| | 382 |
| | (1,477 | ) |
Total change in unrealized gains/losses on derivative instruments | (638 | ) |
| 905 |
|
| (162 | ) |
| | | | | |
Change in unrealized gains/losses on marketable securities, net of tax: | | | | | |
Change in fair value of marketable securities | 3,802 |
| | (3,407 | ) | | (782 | ) |
Adjustment for net (gains)/losses realized and included in net income | 25 |
| | 1 |
| | (64 | ) |
Total change in unrealized gains/losses on marketable securities | 3,827 |
|
| (3,406 | ) |
| (846 | ) |
| | | | | |
Total other comprehensive income/(loss) | 2,781 |
|
| (3,026 | ) |
| (784 | ) |
Total comprehensive income | $ | 58,037 |
|
| $ | 56,505 |
|
| $ | 47,567 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 30
Apple Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
|
| | | | | | | |
| September 28, 2019 | | September 29, 2018 |
ASSETS: |
Current assets: | | | |
Cash and cash equivalents | $ | 48,844 |
| | $ | 25,913 |
|
Marketable securities | 51,713 |
| | 40,388 |
|
Accounts receivable, net | 22,926 |
| | 23,186 |
|
Inventories | 4,106 |
| | 3,956 |
|
Vendor non-trade receivables | 22,878 |
| | 25,809 |
|
Other current assets | 12,352 |
| | 12,087 |
|
Total current assets | 162,819 |
| | 131,339 |
|
| | | |
Non-current assets: | | | |
Marketable securities | 105,341 |
| | 170,799 |
|
Property, plant and equipment, net | 37,378 |
| | 41,304 |
|
Other non-current assets | 32,978 |
| | 22,283 |
|
Total non-current assets | 175,697 |
| | 234,386 |
|
Total assets | $ | 338,516 |
| | $ | 365,725 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY: |
Current liabilities: | | | |
Accounts payable | $ | 46,236 |
| | $ | 55,888 |
|
Other current liabilities | 37,720 |
| | 33,327 |
|
Deferred revenue | 5,522 |
| | 5,966 |
|
Commercial paper | 5,980 |
| | 11,964 |
|
Term debt | 10,260 |
| | 8,784 |
|
Total current liabilities | 105,718 |
| | 115,929 |
|
| | | |
Non-current liabilities: | | | |
Term debt | 91,807 |
| | 93,735 |
|
Other non-current liabilities | 50,503 |
| | 48,914 |
|
Total non-current liabilities | 142,310 |
| | 142,649 |
|
Total liabilities | 248,028 |
| | 258,578 |
|
| | | |
Commitments and contingencies |
| |
|
| | | |
Shareholders’ equity: | | | |
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,443,236 and 4,754,986 shares issued and outstanding, respectively | 45,174 |
| | 40,201 |
|
Retained earnings | 45,898 |
| | 70,400 |
|
Accumulated other comprehensive income/(loss) | (584 | ) | | (3,454 | ) |
Total shareholders’ equity | 90,488 |
| | 107,147 |
|
Total liabilities and shareholders’ equity | $ | 338,516 |
|
| $ | 365,725 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 31
Apple Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except per share amounts)
|
| | | | | | | | | | | |
| Years ended |
| September 28, 2019 | | September 29, 2018 | | September 30, 2017 |
Total shareholders’ equity, beginning balances | $ | 107,147 |
| | $ | 134,047 |
| | $ | 128,249 |
|
| | | | | |
Common stock and additional paid-in capital: | | | | | |
Beginning balances | 40,201 |
| | 35,867 |
| | 31,251 |
|
Common stock issued | 781 |
| | 669 |
| | 555 |
|
Common stock withheld related to net share settlement of equity awards | (2,002 | ) | | (1,778 | ) | | (1,468 | ) |
Share-based compensation | 6,194 |
| | 5,443 |
| | 4,909 |
|
Tax benefit from equity awards, including transfer pricing adjustments | — |
| | — |
| | 620 |
|
Ending balances | 45,174 |
| | 40,201 |
| | 35,867 |
|
| | | | | |
Retained earnings: | | | | | |
Beginning balances | 70,400 |
| | 98,330 |
| | 96,364 |
|
Net income | 55,256 |
| | 59,531 |
| | 48,351 |
|
Dividends and dividend equivalents declared | (14,129 | ) | | (13,735 | ) | | (12,803 | ) |
Common stock withheld related to net share settlement of equity awards | (1,029 | ) | | (948 | ) | | (581 | ) |
Common stock repurchased | (67,101 | ) | | (73,056 | ) | | (33,001 | ) |
Cumulative effects of changes in accounting principles | 2,501 |
| | 278 |
| | — |
|
Ending balances | 45,898 |
| | 70,400 |
| | 98,330 |
|
| | | | | |
Accumulated other comprehensive income/(loss): | | | | | |
Beginning balances | (3,454 | ) | | (150 | ) | | 634 |
|
Other comprehensive income/(loss) | 2,781 |
| | (3,026 | ) | | (784 | ) |
Cumulative effects of changes in accounting principles | 89 |
| | (278 | ) | | — |
|
Ending balances | (584 | ) | | (3,454 | ) | | (150 | ) |
| | | | | |
Total shareholders’ equity, ending balances | $ | 90,488 |
| | $ | 107,147 |
| | $ | 134,047 |
|
| | | | | |
Dividends and dividend equivalents declared per share or RSU | $ | 3.00 |
| | $ | 2.72 |
| | $ | 2.40 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 32
Apple Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
| | | | | | | | | | | |
| Years ended |
| September 28, 2019 | | September 29, 2018 | | September 30, 2017 |
Cash, cash equivalents and restricted cash, beginning balances | $ | 25,913 |
| | $ | 20,289 |
| | $ | 20,484 |
|
Operating activities: | | | | | |
Net income | 55,256 |
| | 59,531 |
| | 48,351 |
|
Adjustments to reconcile net income to cash generated by operating activities: | | | | | |
Depreciation and amortization | 12,547 |
| | 10,903 |
| | 10,157 |
|
Share-based compensation expense | 6,068 |
| | 5,340 |
| | 4,840 |
|
Deferred income tax expense/(benefit) | (340 | ) | | (32,590 | ) | | 5,966 |
|
Other | (652 | ) | | (444 | ) | | (166 | ) |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net | 245 |
| | (5,322 | ) | | (2,093 | ) |
Inventories | (289 | ) | | 828 |
| | (2,723 | ) |
Vendor non-trade receivables | 2,931 |
| | (8,010 | ) | | (4,254 | ) |
Other current and non-current assets | 873 |
| | (423 | ) | | (5,318 | ) |
Accounts payable | (1,923 | ) | | 9,175 |
| | 8,966 |
|
Deferred revenue | (625 | ) | | (3 | ) | | (593 | ) |
Other current and non-current liabilities | (4,700 | ) | | 38,449 |
| | 1,092 |
|
Cash generated by operating activities | 69,391 |
|
| 77,434 |
|
| 64,225 |
|
Investing activities: | | | | | |
Purchases of marketable securities | (39,630 | ) | | (71,356 | ) | | (159,486 | ) |
Proceeds from maturities of marketable securities | 40,102 |
| | 55,881 |
| | 31,775 |
|
Proceeds from sales of marketable securities | 56,988 |
| | 47,838 |
| | 94,564 |
|
Payments for acquisition of property, plant and equipment | (10,495 | ) | | (13,313 | ) | | (12,451 | ) |
Payments made in connection with business acquisitions, net | (624 | ) | | (721 | ) | | (329 | ) |
Purchases of non-marketable securities | (1,001 | ) | | (1,871 | ) | | (521 | ) |
Proceeds from non-marketable securities | 1,634 |
| | 353 |
| | 126 |
|
Other | (1,078 | ) | | (745 | ) | | (124 | ) |
Cash generated by/(used in) investing activities | 45,896 |
|
| 16,066 |
|
| (46,446 | ) |
Financing activities: | | | | | |
Proceeds from issuance of common stock | 781 |
| | 669 |
| | 555 |
|
Payments for taxes related to net share settlement of equity awards | (2,817 | ) | | (2,527 | ) | | (1,874 | ) |
Payments for dividends and dividend equivalents | (14,119 | ) | | (13,712 | ) | | (12,769 | ) |
Repurchases of common stock | (66,897 | ) | | (72,738 | ) | | (32,900 | ) |
Proceeds from issuance of term debt, net | 6,963 |
| | 6,969 |
| | 28,662 |
|
Repayments of term debt | (8,805 | ) | | (6,500 | ) | | (3,500 | ) |
Proceeds from/(Repayments of) commercial paper, net | (5,977 | ) | | (37 | ) | | 3,852 |
|
Other | (105 | ) | | — |
| | — |
|
Cash used in financing activities | (90,976 | ) |
| (87,876 | ) |
| (17,974 | ) |
Increase/(Decrease) in cash, cash equivalents and restricted cash | 24,311 |
| | 5,624 |
| | (195 | ) |
Cash, cash equivalents and restricted cash, ending balances | $ | 50,224 |
|
| $ | 25,913 |
|
| $ | 20,289 |
|
Supplemental cash flow disclosure: | | | | | |
Cash paid for income taxes, net | $ | 15,263 |
| | $ | 10,417 |
| | $ | 11,591 |
|
Cash paid for interest | $ | 3,423 |
| | $ | 3,022 |
| | $ | 2,092 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2019 Form 10-K | 33
Apple Inc.
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The accompanying consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the “Company”). Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation.
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2019 and 2018 spanned 52 weeks each, whereas fiscal year 2017 included 53 weeks. A 14th week was included in the first fiscal quarter of 2017, as is done every five or six years, to realign the Company’s fiscal quarters with calendar quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Recently Adopted Accounting Pronouncements
Revenue Recognition
In the first quarter of 2019, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), and additional ASUs issued to clarify the guidance in ASU 2014-09 (collectively the “new revenue standard”), which amends the existing accounting standards for revenue recognition. The Company adopted the new revenue standard utilizing the full retrospective transition method. The Company did not restate total net sales in the prior periods presented, as the adoption of the new revenue standard did not have a material impact on previously reported amounts.
Additionally, beginning in the first quarter of 2019, the Company classified the amortization of the deferred value of Maps, Siri and free iCloud services, which are bundled in the sales price of iPhone, Mac, iPad and certain other products, in Services net sales. Historically, the Company classified the amortization of these amounts in Products net sales consistent with its management reporting framework. As a result, Products and Services net sales for 2018 and 2017 were reclassified to conform to the 2019 presentation.
Financial Instruments
In the first quarter of 2019, the Company adopted FASB ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which updates certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial statements.
Income Taxes
In the first quarter of 2019, the Company adopted FASB ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted ASU 2016-16 utilizing the modified retrospective transition method. Upon adoption, the Company recorded $2.7 billion of net deferred tax assets, reduced other non-current assets by $128 million, and increased retained earnings by $2.6 billion on its Consolidated Balance Sheet. The Company will recognize incremental deferred income tax expense as these net deferred tax assets are utilized.
Restricted Cash
In the first quarter of 2019, the Company adopted FASB ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows and requires additional disclosures about restricted cash balances.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses.
Apple Inc. | 2019 Form 10-K | 34
Share-Based Compensation
The Company generally measures share-based compensation based on the closing price of the Company’s common stock on the date of grant, and recognizes expense on a straight-line basis for its estimate of equity awards that will ultimately vest. Further information regarding share-based compensation can be found in Note 9, “Benefit Plans.”
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for 2019, 2018 and 2017 (net income in millions and shares in thousands):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Numerator: | | | | | |
Net income | $ | 55,256 |
| | $ | 59,531 |
| | $ | 48,351 |
|
| | | | | |
Denominator: | | | | | |
Weighted-average basic shares outstanding | 4,617,834 |
| | 4,955,377 |
| | 5,217,242 |
|
Effect of dilutive securities | 31,079 |
| | 44,732 |
| | 34,450 |
|
Weighted-average diluted shares | 4,648,913 |
| | 5,000,109 |
|
| 5,251,692 |
|
| | | | | |
Basic earnings per share | $ | 11.97 |
| | $ | 12.01 |
| | $ | 9.27 |
|
Diluted earnings per share | $ | 11.89 |
| | $ | 11.91 |
| | $ | 9.21 |
|
The Company applies the treasury stock method to determine the dilutive effect of potentially dilutive securities. Potentially dilutive securities representing 15.5 million shares of common stock were excluded from the computation of diluted earnings per share for 2019 because their effect would have been antidilutive.
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.
The Company’s investments in marketable debt securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Unrealized gains and losses on marketable debt securities classified as available-for-sale are recognized in other comprehensive income/(loss) (“OCI”).
The Company’s investments in marketable equity securities are classified based on the nature of the securities and their availability for use in current operations. The Company’s marketable equity securities are measured at fair value with gains and losses recognized in other income/(expense), net (“OI&E”).
The cost of securities sold is determined using the specific identification method.
Inventories
Inventories are measured using the first-in, first-out method.
Property, Plant and Equipment
Depreciation on property, plant and equipment is recognized on a straight-line basis over the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building; between one and five years for machinery and equipment, including product tooling and manufacturing process equipment; and the shorter of lease term or useful life for leasehold improvements. Capitalized costs related to internal-use software are amortized on a straight-line basis over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization expense on property and equipment was $11.3 billion, $9.3 billion and $8.2 billion during 2019, 2018 and 2017, respectively.
Non-cash investing activities involving property, plant and equipment resulted in a net increase/(decrease) to accounts payable and other current liabilities of $(2.9) billion and $3.4 billion during 2019 and 2018, respectively.
Apple Inc. | 2019 Form 10-K | 35
Non-Marketable Securities
The Company has elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, the Company’s non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. Gains and losses on non-marketable equity securities are recognized in OI&E.
Restricted Cash and Restricted Marketable Securities
The Company considers cash and marketable securities to be restricted when withdrawal or general use is legally restricted. The Company records restricted cash as other assets in the Consolidated Balance Sheets, and determines current or non-current classification based on the expected duration of the restriction. The Company records restricted marketable securities as current or non-current marketable securities in the Consolidated Balance Sheets based on the classification of the underlying securities.
Fair Value Measurements
The fair values of the Company’s money market funds and certain marketable equity securities are based on quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, which generally have counterparties with high credit ratings, are based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.
Note 2 – Revenue Recognition
Net sales consist of revenue from the sale of iPhone, Mac, iPad, Services and other products. The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company’s Products net sales, control transfers when products are shipped. For the Company’s Services net sales, control transfers over time as services are delivered. Payment for Products and Services net sales is collected within a short period following transfer of control or commencement of delivery of services, as applicable.
The Company records reductions to Products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.
For arrangements with multiple performance obligations, which represent promises within an arrangement that are capable of being distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings, product-specific business objectives and the estimated cost to provide the performance obligation.
The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud, Siri and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided. Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.
For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized revenue, and has elected not to disclose amounts, related to these undelivered services.
Apple Inc. | 2019 Form 10-K | 36
For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product. For third-party applications sold through the App Store, Mac App Store, TV App Store and Watch App Store and certain digital content sold through the Company’s other digital content stores, the Company does not obtain control of the product before transferring it to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in Services net sales only the commission it retains.
The Company has elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.
Deferred Revenue
As of September 28, 2019 and September 29, 2018, the Company had total deferred revenue of $8.1 billion and $8.8 billion, respectively. As of September 28, 2019, the Company expects 68% of total deferred revenue to be realized in less than a year, 25% within one-to-two years, 6% within two-to-three years and 1% in greater than three years.
Disaggregated Revenue
Net sales disaggregated by significant products and services for 2019, 2018 and 2017 were as follows (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
iPhone (1) | $ | 142,381 |
| | $ | 164,888 |
| | $ | 139,337 |
|
Mac (1) | 25,740 |
| | 25,198 |
| | 25,569 |
|
iPad (1) | 21,280 |
| | 18,380 |
| | 18,802 |
|
Wearables, Home and Accessories (1)(2) | 24,482 |
| | 17,381 |
| | 12,826 |
|
Services (3) | 46,291 |
| | 39,748 |
| | 32,700 |
|
Total net sales (4) | $ | 260,174 |
| | $ | 265,595 |
| | $ | 229,234 |
|
| |
(1) | Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product. |
| |
(2) | Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and Apple-branded and third-party accessories. |
| |
(3) | Services net sales include sales from the Company’s digital content stores and streaming services, AppleCare, licensing and other services. Services net sales also include amortization of the deferred value of Maps, Siri and free iCloud services, which are bundled in the sales price of certain products. |
| |
(4) | Includes $5.9 billion of revenue recognized in 2019 that was included in deferred revenue as of September 29, 2018, $5.8 billion of revenue recognized in 2018 that was included in deferred revenue as of September 30, 2017, and $6.3 billion of revenue recognized in 2017 that was included in deferred revenue as of September 24, 2016. |
The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and Geographic Data” for 2019, 2018 and 2017.
Apple Inc. | 2019 Form 10-K | 37
Note 3 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash and marketable securities by significant investment category as of September 28, 2019 and September 29, 2018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities | | Long-Term Marketable Securities |
Cash | $ | 12,204 |
| | $ | — |
| | $ | — |
| | $ | 12,204 |
| | $ | 12,204 |
| | $ | — |
| | $ | — |
|
Level 1 (1): | | | | | | | | | | | | | |
Money market funds | 15,897 |
| | — |
| | — |
| | 15,897 |
| | 15,897 |
| | — |
| | — |
|
Subtotal | 15,897 |
| | — |
| | — |
| | 15,897 |
| | 15,897 |
| | — |
| | — |
|
Level 2 (2): | | | | | | | | | | | | | |
U.S. Treasury securities | 30,293 |
| | 33 |
| | (62 | ) | | 30,264 |
| | 6,165 |
| | 9,817 |
| | 14,282 |
|
U.S. agency securities | 9,767 |
| | 1 |
| | (3 | ) | | 9,765 |
| | 6,489 |
| | 2,249 |
| | 1,027 |
|
Non-U.S. government securities | 19,821 |
| | 337 |
| | (50 | ) | | 20,108 |
| | 749 |
| | 3,168 |
| | 16,191 |
|
Certificates of deposit and time deposits | 4,041 |
| | — |
| | — |
| | 4,041 |
| | 2,024 |
| | 1,922 |
| | 95 |
|
Commercial paper | 12,433 |
| | — |
| | — |
| | 12,433 |
| | 5,193 |
| | 7,240 |
| | — |
|
Corporate debt securities | 85,383 |
| | 756 |
| | (92 | ) | | 86,047 |
| | 123 |
| | 26,127 |
| | 59,797 |
|
Municipal securities | 958 |
| | 8 |
| | (1 | ) | | 965 |
| | — |
| | 68 |
| | 897 |
|
Mortgage- and asset-backed securities | 14,180 |
| | 67 |
| | (73 | ) | | 14,174 |
| | — |
| | 1,122 |
| | 13,052 |
|
Subtotal | 176,876 |
| | 1,202 |
| | (281 | ) | | 177,797 |
| | 20,743 |
| | 51,713 |
| | 105,341 |
|
Total (3) | $ | 204,977 |
| | $ | 1,202 |
| | $ | (281 | ) | | $ | 205,898 |
| | $ | 48,844 |
| | $ | 51,713 |
| | $ | 105,341 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities | | Long-Term Marketable Securities |
Cash | $ | 11,575 |
| | $ | — |
| | $ | — |
| | $ | 11,575 |
| | $ | 11,575 |
| | $ | — |
| | $ | — |
|
Level 1 (1): | | | | | | | | | | | | | |
Money market funds | 8,083 |
| | — |
| | — |
| | 8,083 |
| | 8,083 |
| | — |
| | — |
|
Mutual funds | 799 |
| | — |
| | (116 | ) | | 683 |
| | — |
| | 683 |
| | — |
|
Subtotal | 8,882 |
| | — |
| | (116 | ) | | 8,766 |
| | 8,083 |
| | 683 |
| | — |
|
Level 2 (2): | | | | | | | | | | | | | |
U.S. Treasury securities | 47,296 |
| | — |
| | (1,202 | ) | | 46,094 |
| | 1,613 |
| | 7,606 |
| | 36,875 |
|
U.S. agency securities | 4,127 |
| | — |
| | (48 | ) | | 4,079 |
| | 1,732 |
| | 360 |
| | 1,987 |
|
Non-U.S. government securities | 21,601 |
| | 49 |
| | (250 | ) | | 21,400 |
| | — |
| | 3,355 |
| | 18,045 |
|
Certificates of deposit and time deposits | 3,074 |
| | — |
| | — |
| | 3,074 |
| | 1,247 |
| | 1,330 |
| | 497 |
|
Commercial paper | 2,573 |
| | — |
| | — |
| | 2,573 |
| | 1,663 |
| | 910 |
| | — |
|
Corporate debt securities | 123,001 |
| | 152 |
| | (2,038 | ) | | 121,115 |
| | — |
| | 25,162 |
| | 95,953 |
|
Municipal securities | 946 |
| | — |
| | (12 | ) | | 934 |
| | — |
| | 178 |
| | 756 |
|
Mortgage- and asset-backed securities | 18,105 |
| | 8 |
| | (623 | ) | | 17,490 |
| | — |
| | 804 |
| | 16,686 |
|
Subtotal | 220,723 |
| | 209 |
| | (4,173 | ) | | 216,759 |
| | 6,255 |
| | 39,705 |
| | 170,799 |
|
Total (3) | $ | 241,180 |
| | $ | 209 |
| | $ | (4,289 | ) | | $ | 237,100 |
| | $ | 25,913 |
| | $ | 40,388 |
| | $ | 170,799 |
|
| |
(1) | Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities. |
| |
(2) | Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
(3) | As of September 28, 2019 and September 29, 2018, total cash, cash equivalents and marketable securities included $18.9 billion and $20.3 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements. |
Apple Inc. | 2019 Form 10-K | 38
The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. The maturities of the Company’s long-term marketable debt securities generally range from one to five years.
The following tables show information about the Company’s marketable securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or greater as of September 28, 2019 and September 29, 2018 (in millions):
|
| | | | | | | | | | | |
| 2019 |
| Continuous Unrealized Losses |
| Less than 12 Months | | 12 Months or Greater | | Total |
Fair value of marketable debt securities | $ | 28,151 |
| | $ | 28,167 |
| | $ | 56,318 |
|
Unrealized losses | $ | (138 | ) | | $ | (143 | ) | | $ | (281 | ) |
|
| | | | | | | | | | | |
| 2018 |
| Continuous Unrealized Losses |
| Less than 12 Months | | 12 Months or Greater | | Total |
Fair value of marketable securities | $ | 126,238 |
| | $ | 60,599 |
| | $ | 186,837 |
|
Unrealized losses | $ | (2,400 | ) | | $ | (1,889 | ) | | $ | (4,289 | ) |
The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. When evaluating a marketable debt security for other-than-temporary impairment, the Company reviews factors such as the duration and extent to which the fair value of the security is less than its cost, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis. As of September 28, 2019, the Company does not consider any of its marketable debt securities to be other-than-temporarily impaired.
Non-Marketable Securities
The Company holds non-marketable equity securities of certain privately held companies without readily determinable fair values. As of September 28, 2019, the Company’s non-marketable equity securities had a carrying value of $2.9 billion.
Restricted Cash
A reconciliation of the Company’s cash and cash equivalents in the Consolidated Balance Sheet to cash, cash equivalents and restricted cash in the Consolidated Statement of Cash Flows as of September 28, 2019 is as follows (in millions):
|
| | | |
| 2019 |
Cash and cash equivalents | $ | 48,844 |
|
Restricted cash included in other current assets | 23 |
|
Restricted cash included in other non-current assets | 1,357 |
|
Cash, cash equivalents and restricted cash | $ | 50,224 |
|
The Company’s restricted cash primarily consisted of cash required to be on deposit under a contractual agreement with a bank to support the Company’s iPhone Upgrade Program.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, net investments in certain foreign subsidiaries, and certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.
To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
Apple Inc. | 2019 Form 10-K | 39
To protect the net investment in a foreign operation from fluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such as its foreign currency–denominated debt, as hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value. The Company may designate these instruments as either cash flow or fair value hedges. As of September 28, 2019, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 23 years.
The Company may also enter into non-designated foreign currency contracts to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. These instruments may offset a portion of the changes in interest income or expense, or changes in fair value. The Company designates these instruments as either cash flow or fair value hedges. As of September 28, 2019, the Company’s hedged interest rate transactions are expected to be recognized within 8 years.
Cash Flow Hedges
The effective portions of cash flow hedges are recorded in accumulated other comprehensive income/(loss) (“AOCI”) until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in OI&E in the same period as the related income or expense is recognized. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. The ineffective portions and amounts excluded from the effectiveness testing of cash flow hedges are recognized in OI&E.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into OI&E in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in OI&E unless they are re-designated as hedges of other transactions.
Net Investment Hedges
The effective portions of net investment hedges are recorded in OCI as a part of the cumulative translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment hedges are recognized in OI&E. For foreign exchange forward contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its assessment of hedge effectiveness. Accordingly, any gains or losses related to this forward carry component are recognized in earnings in the current period.
Fair Value Hedges
Gains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related to the change in value of the underlying hedged item in the same line in the Consolidated Statements of Operations. For foreign exchange forward contracts designated as fair value hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its assessment of hedge effectiveness. The amount excluded from the effectiveness testing of fair value hedges was a gain of $777 million for 2019, and was recognized in OI&E.
Non-Designated Derivatives
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
Apple Inc. | 2019 Form 10-K | 40
The Company records all derivatives in the Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value as of September 28, 2019 and September 29, 2018 (in millions):
|
| | | | | | | | | | | |
| 2019 |
| Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value |
Derivative assets (1): | | | | | |
Foreign exchange contracts | $ | 1,798 |
| | $ | 323 |
| | $ | 2,121 |
|
Interest rate contracts | $ | 685 |
| | $ | — |
| | $ | 685 |
|
| | | | | |
Derivative liabilities (2): | | | | | |
Foreign exchange contracts | $ | 1,341 |
| | $ | 160 |
| | $ | 1,501 |
|
Interest rate contracts | $ | 105 |
| | $ | — |
| | $ | 105 |
|
|
| | | | | | | | | | | |
| 2018 |
| Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value |
Derivative assets (1): | | | | | |
Foreign exchange contracts | $ | 1,015 |
| | $ | 259 |
| | $ | 1,274 |
|
| | | | | |
Derivative liabilities (2): | | | | | |
Foreign exchange contracts | $ | 543 |
| | $ | 137 |
| | $ | 680 |
|
Interest rate contracts | $ | 1,456 |
| | $ | — |
| | $ | 1,456 |
|
| |
(1) | The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets and other non-current assets in the Consolidated Balance Sheets. |
| |
(2) | The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as other current liabilities and other non-current liabilities in the Consolidated Balance Sheets. |
The Company classifies cash flows related to derivative financial instruments as operating activities in its Consolidated Statements of Cash Flows.
Apple Inc. | 2019 Form 10-K | 41
The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow, net investment and fair value hedges in OCI and the Consolidated Statements of Operations for 2019, 2018 and 2017 (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Gains/(Losses) recognized in OCI – effective portion: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange contracts | $ | (959 | ) | | $ | 682 |
| | $ | 1,797 |
|
Interest rate contracts | — |
| | 1 |
| | 7 |
|
Total | $ | (959 | ) |
| $ | 683 |
|
| $ | 1,804 |
|
| | | | | |
Net investment hedges: | | | | | |
Foreign currency debt | $ | (58 | ) | | $ | 4 |
| | $ | 67 |
|
| | | | | |
Gains/(Losses) reclassified from AOCI into net income – effective portion: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange contracts | $ | (116 | ) | | $ | (482 | ) | | $ | 1,958 |
|
Interest rate contracts | (7 | ) | | 1 |
| | (2 | ) |
Total | $ | (123 | ) |
| $ | (481 | ) |
| $ | 1,956 |
|
| | | | | |
Gains/(Losses) on derivative instruments: | | | | | |
Fair value hedges: | | | | | |
Foreign exchange contracts | $ | 1,020 |
| | $ | (168 | ) | | $ | — |
|
Interest rate contracts | 2,068 |
| | (1,363 | ) | | (810 | ) |
Total | $ | 3,088 |
| | $ | (1,531 | ) | | $ | (810 | ) |
| | | | | |
Gains/(Losses) related to hedged items: | | | | | |
Fair value hedges: | | | | | |
Marketable securities | $ | (1,018 | ) | | $ | 167 |
| | $ | — |
|
Fixed-rate debt | (2,068 | ) | | 1,363 |
| | 810 |
|
Total | $ | (3,086 | ) | | $ | 1,530 |
| | $ | 810 |
|
The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 28, 2019 and September 29, 2018 (in millions):
|
| | | | | | | | | | | | | | | |
| 2019 | | 2018 |
| Notional Amount | | Credit Risk Amount | | Notional Amount | | Credit Risk Amount |
Instruments designated as accounting hedges: | | | | | | | |
Foreign exchange contracts | $ | 61,795 |
| | $ | 1,798 |
| | $ | 65,368 |
| | $ | 1,015 |
|
Interest rate contracts | $ | 31,250 |
| | $ | 685 |
| | $ | 33,250 |
| | $ | — |
|
| | | | | | | |
Instruments not designated as accounting hedges: | | | | | | | |
Foreign exchange contracts | $ | 76,868 |
| | $ | 323 |
| | $ | 63,062 |
| | $ | 259 |
|
The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
Apple Inc. | 2019 Form 10-K | 42
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. As of September 28, 2019, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $1.6 billion, which was recorded as other current liabilities in the Consolidated Balance Sheet. As of September 29, 2018, the net cash collateral posted by the Company related to derivative instruments under its collateral security arrangements was $1.0 billion, which was recorded as other current assets in the Consolidated Balance Sheet.
Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. As of September 28, 2019 and September 29, 2018, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $2.7 billion and $2.1 billion, respectively, resulting in a net derivative liability of $407 million and a net derivative asset of $138 million, respectively.
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of September 28, 2019, the Company had no customers that individually represented 10% or more of total trade receivables. As of September 29, 2018, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 10%. The Company’s cellular network carriers accounted for 51% and 59% of total trade receivables as of September 28, 2019 and September 29, 2018, respectively.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of September 28, 2019, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 59% and 14%. As of September 29, 2018, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 62% and 12%.
Note 4 – Consolidated Financial Statement Details
The following tables show the Company’s consolidated financial statement details as of September 28, 2019 and September 29, 2018 (in millions):
Property, Plant and Equipment, Net
|
| | | | | | | |
| 2019 | | 2018 |
Land and buildings | $ | 17,085 |
| | $ | 16,216 |
|
Machinery, equipment and internal-use software | 69,797 |
| | 65,982 |
|
Leasehold improvements | 9,075 |
| | 8,205 |
|
Gross property, plant and equipment | 95,957 |
| | 90,403 |
|
Accumulated depreciation and amortization | (58,579 | ) | | (49,099 | ) |
Total property, plant and equipment, net | $ | 37,378 |
| | $ | 41,304 |
|
Apple Inc. | 2019 Form 10-K | 43
Other Non-Current Liabilities
|
| | | | | | | |
| 2019 | | 2018 |
Long-term taxes payable | $ | 29,545 |
| | $ | 33,589 |
|
Other non-current liabilities | 20,958 |
| | 15,325 |
|
Total other non-current liabilities | $ | 50,503 |
| | $ | 48,914 |
|
Other Income/(Expense), Net
The following table shows the detail of OI&E for 2019, 2018 and 2017 (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Interest and dividend income | $ | 4,961 |
| | $ | 5,686 |
| | $ | 5,201 |
|
Interest expense | (3,576 | ) | | (3,240 | ) | | (2,323 | ) |
Other income/(expense), net | 422 |
| | (441 | ) | | (133 | ) |
Total other income/(expense), net | $ | 1,807 |
| | $ | 2,005 |
| | $ | 2,745 |
|
Note 5 – Income Taxes
U.S. Tax Cuts and Jobs Act
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain foreign earnings, for which the Company has elected to record certain deferred tax assets and liabilities. The Company completed its accounting for the income tax effects of the Act during 2019, in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118.
Provision for Income Taxes and Effective Tax Rate
The provision for income taxes for 2019, 2018 and 2017, consisted of the following (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Federal: | | | | | |
Current | $ | 6,384 |
| | $ | 41,425 |
| | $ | 7,842 |
|
Deferred | (2,939 | ) | | (33,819 | ) | | 5,980 |
|
Total | 3,445 |
|
| 7,606 |
|
| 13,822 |
|
State: | | | | | |
Current | 475 |
| | 551 |
| | 259 |
|
Deferred | (67 | ) | | 48 |
| | 2 |
|
Total | 408 |
|
| 599 |
|
| 261 |
|
Foreign: | | | | | |
Current | 3,962 |
| | 3,986 |
| | 1,671 |
|
Deferred | 2,666 |
| | 1,181 |
| | (16 | ) |
Total | 6,628 |
|
| 5,167 |
|
| 1,655 |
|
Provision for income taxes | $ | 10,481 |
|
| $ | 13,372 |
|
| $ | 15,738 |
|
The foreign provision for income taxes is based on foreign pre-tax earnings of $44.3 billion, $48.0 billion and $44.7 billion in 2019, 2018 and 2017, respectively.
Apple Inc. | 2019 Form 10-K | 44
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (21% in 2019; 24.5% in 2018; 35% in 2017) to income before provision for income taxes for 2019, 2018 and 2017, is as follows (dollars in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Computed expected tax | $ | 13,805 |
| | $ | 17,890 |
| | $ | 22,431 |
|
State taxes, net of federal effect | 423 |
| | 271 |
| | 185 |
|
Impacts of the Act | — |
| | 1,515 |
| | — |
|
Earnings of foreign subsidiaries | (2,625 | ) | | (5,606 | ) | | (6,135 | ) |
Research and development credit, net | (548 | ) | | (560 | ) | | (678 | ) |
Excess tax benefits from equity awards | (639 | ) | | (675 | ) | | — |
|
Other | 65 |
| | 537 |
| | (65 | ) |
Provision for income taxes | $ | 10,481 |
|
| $ | 13,372 |
|
| $ | 15,738 |
|
Effective tax rate | 15.9 | % | | 18.3 | % | | 24.6 | % |
The Company’s income taxes payable have been reduced by the tax benefits from employee stock plan awards. For restricted stock units (“RSUs”), the Company receives an income tax benefit upon the award’s vesting equal to the tax effect of the underlying stock’s fair market value. Prior to 2018, the Company reflected net excess tax benefits from equity awards as increases to additional paid-in capital, which amounted to $620 million in 2017.
Deferred Tax Assets and Liabilities
As of September 28, 2019 and September 29, 2018, the significant components of the Company’s deferred tax assets and liabilities were (in millions):
|
| | | | | | | |
| 2019 | | 2018 |
Deferred tax assets: | | | |
Amortization and depreciation | $ | 11,433 |
| | $ | 137 |
|
Accrued liabilities and other reserves | 5,389 |
| | 3,151 |
|
Deferred revenue | 1,372 |
| | 1,141 |
|
Share-based compensation | 749 |
| | 513 |
|
Unrealized losses | — |
| | 871 |
|
Other | 697 |
| | 797 |
|
Total deferred tax assets, net | 19,640 |
| | 6,610 |
|
Deferred tax liabilities: | | | |
Minimum tax on foreign earnings | 10,809 |
| | — |
|
Earnings of foreign subsidiaries | 330 |
| | 275 |
|
Other | 456 |
| | 501 |
|
Total deferred tax liabilities | 11,595 |
| | 776 |
|
Net deferred tax assets/(liabilities) | $ | 8,045 |
|
| $ | 5,834 |
|
Deferred tax assets and liabilities reflect the effects of tax credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Apple Inc. | 2019 Form 10-K | 45
Uncertain Tax Positions
As of September 28, 2019, the total amount of gross unrecognized tax benefits was $15.6 billion, of which $8.6 billion, if recognized, would impact the Company’s effective tax rate. As of September 29, 2018, the total amount of gross unrecognized tax benefits was $9.7 billion, of which $7.4 billion, if recognized, would have impacted the Company’s effective tax rate.
The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2019, 2018 and 2017, is as follows (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Beginning balances | $ | 9,694 |
| | $ | 8,407 |
| | $ | 7,724 |
|
Increases related to tax positions taken during a prior year | 5,845 |
| | 2,431 |
| | 333 |
|
Decreases related to tax positions taken during a prior year | (686 | ) | | (2,212 | ) | | (952 | ) |
Increases related to tax positions taken during the current year | 1,697 |
| | 1,824 |
| | 1,880 |
|
Decreases related to settlements with taxing authorities | (852 | ) | | (756 | ) | | (539 | ) |
Decreases related to expiration of the statute of limitations | (79 | ) | | — |
| | (39 | ) |
Ending balances | $ | 15,619 |
| | $ | 9,694 |
| | $ | 8,407 |
|
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. The U.S. Internal Revenue Service (the “IRS”) concluded its review of the years 2013 through 2015 in 2018, and all years before 2016 are closed. Tax years after 2014 remain open in certain major foreign jurisdictions and are subject to examination by the taxing authorities. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although the timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease in the next 12 months by as much as $2.0 billion.
Interest and Penalties
The Company includes interest and penalties related to income tax matters within the provision for income taxes. As of September 28, 2019 and September 29, 2018, the total amount of gross interest and penalties accrued was $1.3 billion and $1.4 billion, respectively. The Company recognized interest and penalty expense in 2019, 2018 and 2017 of $73 million, $489 million and $238 million, respectively.
European Commission State Aid Decision
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. During the fourth quarter of 2019, the Irish Minister for Finance approved the Company’s request to reduce the recovery amount by €190 million due to taxes paid to other countries, resulting in an adjusted recovery amount of €12.9 billion as of September 28, 2019. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the Act. As of September 28, 2019, the entire adjusted recovery amount plus interest was funded into escrow, where it will remain restricted from general use pending the conclusion of all appeals. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.
Apple Inc. | 2019 Form 10-K | 46
Note 6 – Debt
Commercial Paper
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 28, 2019 and September 29, 2018, the Company had $6.0 billion and $12.0 billion of Commercial Paper outstanding, respectively, with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 2.24% and 2.18% as of September 28, 2019 and September 29, 2018, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2019, 2018 and 2017 (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Maturities 90 days or less: | | | | | |
Proceeds from/(Repayments of) commercial paper, net | $ | (3,248 | ) | | $ | 1,044 |
| | $ | (1,782 | ) |
| | | | | |
Maturities greater than 90 days: | | | | | |
Proceeds from commercial paper | 13,874 |
| | 14,555 |
| | 17,932 |
|
Repayments of commercial paper | (16,603 | ) | | (15,636 | ) | | (12,298 | ) |
Proceeds from/(Repayments of) commercial paper, net | (2,729 | ) |
| (1,081 | ) | | 5,634 |
|
| | | | | |
Total proceeds from/(repayments of) commercial paper, net | $ | (5,977 | ) |
| $ | (37 | ) | | $ | 3,852 |
|
Term Debt
As of September 28, 2019, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $101.7 billion (collectively the “Notes”). The Notes are senior unsecured obligations and interest is payable in arrears. The following table provides a summary of the Company’s term debt as of September 28, 2019 and September 29, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Maturities (calendar year) | | 2019 | | 2018 |
| Amount (in millions) | | Effective Interest Rate | | Amount (in millions) | | Effective Interest Rate |
2013–2018 debt issuances: | | | | | | | | | | | | | | | | | |
Floating-rate notes | 2020 | – | 2022 | | $ | 4,250 |
| | | 2.25% | – | 3.28 | % | | $ | 7,107 |
| | | 1.87% | – | 3.44 | % |
Fixed-rate 0.350% – 4.650% notes | 2019 | – | 2047 | | 90,429 |
| | | 0.28% | – | 4.78 | % | | 97,086 |
| | | 0.28% | – | 4.78 | % |
| | | | | | | | | | | | | | | | | |
2019 debt issuance: | | | | | | | | | | | | | | | | | |
Fixed-rate 1.700% – 2.950% notes | 2022 | – | 2049 | | 7,000 |
| | | 1.71% | – | 2.99 | % | | — |
| | | | | — | % |
Total term debt | | | | | 101,679 |
| | | | | | | 104,193 |
| | | | | |
| | | | | | | | | | | | | | | | | |
Unamortized premium/(discount) and issuance costs, net | | | | | (224 | ) | | | | | | | (218 | ) | | | | | |
Hedge accounting fair value adjustments | | | | | 612 |
| | | | | | | (1,456 | ) | | | | | |
Less: Current portion of term debt | | | | | (10,260 | ) | | | | | | | (8,784 | ) | | | | | |
Total non-current portion of term debt | | | | | $ | 91,807 |
| | | | | | | $ | 93,735 |
| | | | | |
To manage interest rate risk on certain of its U.S. dollar–denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.
A portion of the Company’s Japanese yen–denominated notes is designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation. As of September 28, 2019 and September 29, 2018, the carrying value of the debt designated as a net investment hedge was $1.0 billion and $811 million, respectively. For further discussion regarding the Company’s use of derivative instruments, refer to the Derivative Financial Instruments section of Note 3, “Financial Instruments.”
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to hedging. The Company recognized $3.2 billion, $3.0 billion and $2.2 billion of interest cost on its term debt for 2019, 2018 and 2017, respectively.
Apple Inc. | 2019 Form 10-K | 47
The future principal payments for the Company’s Notes as of September 28, 2019 are as follows (in millions):
|
| | | |
2020 | $ | 10,270 |
|
2021 | 8,750 |
|
2022 | 9,528 |
|
2023 | 9,290 |
|
2024 | 10,039 |
|
Thereafter | 53,802 |
|
Total term debt | $ | 101,679 |
|
As of September 28, 2019 and September 29, 2018, the fair value of the Company’s Notes, based on Level 2 inputs, was $107.5 billion and $103.2 billion, respectively.
Note 7 – Shareholders’ Equity
Share Repurchase Program
On April 30, 2019, the Company announced the Board of Directors increased the current share repurchase program authorization from $100 billion to $175 billion of the Company’s common stock, of which $96.1 billion had been utilized as of September 28, 2019. During 2019, the Company repurchased 345.2 million shares of its common stock for $67.1 billion, including 62.0 million shares delivered under a $12.0 billion accelerated share repurchase arrangement dated February 2019, which settled in August 2019. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Shares of Common Stock
The following table shows the changes in shares of common stock for 2019, 2018 and 2017 (in thousands):
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Common stock outstanding, beginning balances | 4,754,986 |
| | 5,126,201 |
| | 5,336,166 |
|
Common stock repurchased | (345,205 | ) | | (405,549 | ) | | (246,496 | ) |
Common stock issued, net of shares withheld for employee taxes | 33,455 |
| | 34,334 |
| | 36,531 |
|
Common stock outstanding, ending balances | 4,443,236 |
| | 4,754,986 |
| | 5,126,201 |
|
Note 8 – Comprehensive Income
The Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on marketable debt securities classified as available-for-sale.
The following table shows the pre-tax amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial statement line item, for 2019 and 2018 (in millions):
|
| | | | | | | | | | |
Comprehensive Income Components | | Financial Statement Line Item | | 2019 | | 2018 |
Unrealized (gains)/losses on derivative instruments: | | | | | | |
Foreign exchange contracts | | Total net sales | | $ | (206 | ) | | $ | 214 |
|
| | Total cost of sales | | (482 | ) | | (70 | ) |
| | Other income/(expense), net | | 784 |
| | 344 |
|
Interest rate contracts | | Other income/(expense), net | | 7 |
| | (2 | ) |
| | | | 103 |
| | 486 |
|
Unrealized (gains)/losses on marketable securities | | Other income/(expense), net | | 31 |
| | (20 | ) |
Total amounts reclassified from AOCI | | | | $ | 134 |
| | $ | 466 |
|
Apple Inc. | 2019 Form 10-K | 48
The following table shows the changes in AOCI by component for 2019 and 2018 (in millions):
|
| | | | | | | | | | | | | | | |
| Cumulative Foreign Currency Translation | | Unrealized Gains/Losses on Derivative Instruments | | Unrealized Gains/Losses on Marketable Securities | | Total |
Balances as of September 30, 2017 | $ | (354 | ) | | $ | (124 | ) | | $ | 328 |
| | $ | (150 | ) |
Other comprehensive income/(loss) before reclassifications | (524 | ) | | 672 |
| | (4,563 | ) | | (4,415 | ) |
Amounts reclassified from AOCI | — |
| | 486 |
| | (20 | ) | | 466 |
|
Tax effect | (1 | ) | | (253 | ) | | 1,177 |
| | 923 |
|
Other comprehensive income/(loss) | (525 | ) |
| 905 |
|
| (3,406 | ) |
| (3,026 | ) |
Cumulative effect of change in accounting principle | (176 | ) | | 29 |
| | (131 | ) | | (278 | ) |
Balances as of September 29, 2018 | (1,055 | ) | | 810 |
| | (3,209 | ) | | (3,454 | ) |
Other comprehensive income/(loss) before reclassifications | (421 | ) | | (949 | ) | | 4,854 |
| | 3,484 |
|
Amounts reclassified from AOCI | — |
| | 103 |
| | 31 |
| | 134 |
|
Tax effect | 13 |
| | 208 |
| | (1,058 | ) | | (837 | ) |
Other comprehensive income/(loss) | (408 | ) |
| (638 | ) |
| 3,827 |
|
| 2,781 |
|
Cumulative effect of change in accounting principle (1) | — |
| | — |
| | 89 |
| | 89 |
|
Balances as of September 28, 2019 | $ | (1,463 | ) |
| $ | 172 |
|
| $ | 707 |
|
| $ | (584 | ) |
| |
(1) | Refer to Note 1, “Summary of Significant Accounting Policies” for more information on the Company’s adoption of ASU 2016-01 in 2019. |
Note 9 – Benefit Plans
2014 Employee Stock Plan
In the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the “2014 Plan”) and terminated the Company’s authority to grant new awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of RSUs, stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards. RSUs granted under the 2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. RSUs granted under the 2014 Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the 2014 Plan utilizing a factor of two times the number of RSUs canceled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 385 million shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares subject to outstanding awards under the 2003 Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations for RSUs, will also be available for awards under the 2014 Plan. As of September 28, 2019, approximately 246.4 million shares were reserved for future issuance under the 2014 Plan.
Apple Inc. Non-Employee Director Stock Plan
The Apple Inc. Non-Employee Director Stock Plan (the “Director Plan”) is a shareholder-approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the value and relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants, in each case within the limits set forth in the Director Plan and without further shareholder approval. RSUs granted under the Director Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. The Director Plan expires on November 12, 2027. All RSUs granted under the Director Plan are entitled to DERs. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. As of September 28, 2019, approximately 1.1 million shares were reserved for future issuance under the Director Plan.
Apple Inc. | 2019 Form 10-K | 49
Rule 10b5-1 Trading Plans
During the three months ended September 28, 2019, Section 16 officers Timothy D. Cook, Chris Kondo, Luca Maestri, Deirdre O’Brien and Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired under the Company’s employee and director equity plans.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder-approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 28, 2019, approximately 31.1 million shares were reserved for future issuance under the Purchase Plan.
401(k) Plan
The Company’s 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($19,000 for calendar year 2019). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum of 6% of the employee’s eligible earnings.
Restricted Stock Units
A summary of the Company’s RSU activity and related information for 2019, 2018 and 2017, is as follows:
|
| | | | | | | | | | |
| Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value Per RSU | | Aggregate Fair Value (in millions) |
Balance as of September 24, 2016 | 99,089 |
| | $ | 97.54 |
| | |
RSUs granted | 50,112 |
| | $ | 121.65 |
| | |
RSUs vested | (45,735 | ) | | $ | 95.48 |
| | |
RSUs canceled | (5,895 | ) | | $ | 106.87 |
| | |
Balance as of September 30, 2017 | 97,571 |
| | $ | 110.33 |
| | |
RSUs granted | 45,351 |
| | $ | 162.86 |
| | |
RSUs vested | (44,718 | ) | | $ | 111.24 |
| | |
RSUs canceled | (6,049 | ) | | $ | 127.82 |
| | |
Balance as of September 29, 2018 | 92,155 |
| | $ | 134.60 |
| | |
RSUs granted | 36,852 |
| | $ | 215.95 |
| | |
RSUs vested | (42,088 | ) | | $ | 135.21 |
| | |
RSUs canceled | (5,402 | ) | | $ | 162.85 |
| | |
Balance as of September 28, 2019 | 81,517 |
| | $ | 169.18 |
| | $ | 17,838 |
|
The fair value as of the respective vesting dates of RSUs was $8.6 billion, $7.6 billion and $6.1 billion for 2019, 2018 and 2017, respectively. The majority of RSUs that vested in 2019, 2018 and 2017 were net share settled such that the Company withheld shares with a value equivalent to the employees’ obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 14.8 million, 16.0 million and 15.4 million for 2019, 2018 and 2017, respectively, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $3.0 billion, $2.7 billion and $2.0 billion in 2019, 2018 and 2017, respectively. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.
Apple Inc. | 2019 Form 10-K | 50
Share-Based Compensation
The following table shows share-based compensation expense and the related income tax benefit included in the Consolidated Statements of Operations for 2019, 2018 and 2017 (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Share-based compensation expense | $ | 6,068 |
| | $ | 5,340 |
| | $ | 4,840 |
|
Income tax benefit related to share-based compensation expense | $ | (1,967 | ) | | $ | (1,893 | ) | | $ | (1,632 | ) |
As of September 28, 2019, the total unrecognized compensation cost related to outstanding RSUs and stock options was $10.5 billion, which the Company expects to recognize over a weighted-average period of 2.5 years.
Note 10 – Commitments and Contingencies
Accrued Warranty and Guarantees
The following table shows changes in the Company’s accrued warranties and related costs for 2019, 2018 and 2017 (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Beginning accrued warranty and related costs | $ | 3,692 |
| | $ | 3,834 |
| | $ | 3,702 |
|
Cost of warranty claims | (3,857 | ) | | (4,115 | ) | | (4,322 | ) |
Accruals for product warranty | 3,735 |
| | 3,973 |
| | 4,454 |
|
Ending accrued warranty and related costs | $ | 3,570 |
|
| $ | 3,692 |
|
| $ | 3,834 |
|
The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and mainland China. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within net sales.
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. The Company also competes for various components with other participants in the markets for smartphones, personal computers, tablets and other electronic devices. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacities have increased. The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.
The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland.
Other Off–Balance Sheet Commitments
Operating Leases
The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not currently utilize any other off–balance sheet financing arrangements. As of September 28, 2019, the Company’s total future minimum lease payments under noncancelable operating leases were $10.8 billion. The Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.
Apple Inc. | 2019 Form 10-K | 51
Rent expense under all operating leases, including both cancelable and noncancelable leases, was $1.3 billion, $1.2 billion and $1.1 billion in 2019, 2018 and 2017, respectively. Future minimum lease payments under noncancelable operating leases having initial or remaining terms in excess of one year as of September 28, 2019, are as follows (in millions):
|
| | | |
2020 | $ | 1,306 |
|
2021 | 1,276 |
|
2022 | 1,137 |
|
2023 | 912 |
|
2024 | 834 |
|
Thereafter | 5,373 |
|
Total | $ | 10,838 |
|
Unconditional Purchase Obligations
The Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for supplier arrangements, Internet and telecommunication services, intellectual property licenses and content creation. Future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year as of September 28, 2019, are as follows (in millions):
|
| | | |
2020 | $ | 2,476 |
|
2021 | 2,386 |
|
2022 | 1,859 |
|
2023 | 1,162 |
|
2024 | 218 |
|
Thereafter | 110 |
|
Total | $ | 8,211 |
|
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully resolved. The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims, except for the following matters:
VirnetX
VirnetX, Inc. (“VirnetX”) filed two lawsuits in the U.S. District Court for the Eastern District of Texas (the “Eastern Texas District Court”) against the Company alleging that certain Company products infringe four patents (the “VirnetX Patents”) relating to network communications technology (“VirnetX I” and “VirnetX II”). On September 30, 2016, a jury returned a verdict in VirnetX I against the Company and awarded damages of $302 million, which later increased to $440 million in post-trial proceedings. The Company appealed the VirnetX I verdict to the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”). On April 11, 2018, a jury returned a verdict in VirnetX II against the Company and awarded damages of $503 million. VirnetX II is currently on appeal. The Company has challenged the validity of the VirnetX Patents at the U.S. Patent and Trademark Office (the “PTO”). In response, the PTO has declared the VirnetX Patents invalid. VirnetX appealed the invalidity decision of the PTO to the Federal Circuit. The Federal Circuit consolidated the Company’s appeal of the Eastern Texas District Court VirnetX I verdict and VirnetX’s appeals from the PTO invalidity proceedings. On January 15, 2019, the Federal Circuit affirmed the VirnetX I verdict, which the Company intends to further appeal. On July 8, 2019, the Federal Circuit remanded one of VirnetX’s two appeals of the PTO’s invalidity decisions back to the PTO for further proceedings. On August 1, 2019, the Federal Circuit affirmed-in-part, vacated-in-part, and remanded back to the PTO portions of VirnetX’s second appeal. The Company has accrued its best estimate for the ultimate resolution of these matters.
Apple Inc. | 2019 Form 10-K | 52
Qualcomm
On January 20, 2017, the Company filed a lawsuit against Qualcomm Incorporated and affiliated parties (“Qualcomm”) in the U.S. District Court for the Southern District of California seeking, among other things, to enjoin Qualcomm from requiring the Company to pay royalties at the rate demanded by Qualcomm. No Qualcomm-related royalty payments had been remitted by the Company to its contract manufacturers since the beginning of the second quarter of 2017. Following the Company’s lawsuit, Qualcomm filed patent infringement suits against the Company and its affiliates in the U.S. and various international jurisdictions, some of which sought to enjoin the sale of certain of the Company’s products in particular countries.
On April 16, 2019, the Company and Qualcomm reached a settlement agreement to dismiss all litigation between the two companies worldwide. The companies also reached a multi-year license agreement and a multi-year supply agreement. Under the terms of the settlement agreement, Apple made a payment to Qualcomm to, among other things, resolve disputes over the withheld royalty payments.
iOS Performance Management Cases
Various civil litigation matters have been filed in state and federal courts in the U.S. and in various international jurisdictions alleging violation of consumer protection laws, fraud, computer intrusion and other causes of action related to the Company’s performance management feature used in its iPhone operating systems, introduced to certain iPhones in iOS updates 10.2.1 and 11.2. The claims seek monetary damages and other non-monetary relief. On April 5, 2018, several U.S. federal actions were consolidated through a Multidistrict Litigation process into a single action in the U.S. District Court for the Northern District of California. In addition to civil litigation, the Company is also responding to governmental investigations and requests for information relating to the performance management feature. The Company believes that its iPhones were not defective, that the performance management feature introduced with iOS updates 10.2.1 and 11.2 was intended to, and did, improve customers’ user experience, and that the Company did not make any misleading statements or fail to disclose any material information. The Company has accrued its best estimate for the ultimate resolution of these matters.
French Competition Authority
In June 2019, the French Competition Authority (“FCA”) issued a report alleging that aspects of the Company’s sales and distribution practices in France violate French competition law. The Company vigorously disagrees with the allegations, and a hearing of arguments was held before the FCA on October 15, 2019. The Company is awaiting the decision of the FCA, which may include a fine.
Note 11 – Segment Information and Geographic Data
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.”
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
Apple Inc. | 2019 Form 10-K | 53
The following table shows information by reportable segment for 2019, 2018 and 2017 (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Americas: | | | | | |
Net sales | $ | 116,914 |
| | $ | 112,093 |
| | $ | 96,600 |
|
Operating income | $ | 35,099 |
| | $ | 34,864 |
| | $ | 30,684 |
|
| | | | | |
Europe: | | | | | |
Net sales | $ | 60,288 |
| | $ | 62,420 |
| | $ | 54,938 |
|
Operating income | $ | 19,195 |
| | $ | 19,955 |
| | $ | 16,514 |
|
| | | | | |
Greater China: | | | | | |
Net sales | $ | 43,678 |
| | $ | 51,942 |
| | $ | 44,764 |
|
Operating income | $ | 16,232 |
| | $ | 19,742 |
| | $ | 17,032 |
|
| | | | | |
Japan: | | | | | |
Net sales | $ | 21,506 |
| | $ | 21,733 |
| | $ | 17,733 |
|
Operating income | $ | 9,369 |
| | $ | 9,500 |
| | $ | 8,097 |
|
| | | | | |
Rest of Asia Pacific: | | | | | |
Net sales | $ | 17,788 |
| | $ | 17,407 |
| | $ | 15,199 |
|
Operating income | $ | 6,055 |
| | $ | 6,181 |
| | $ | 5,304 |
|
A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for 2019, 2018 and 2017 is as follows (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Segment operating income | $ | 85,950 |
| | $ | 90,242 |
| | $ | 77,631 |
|
Research and development expense | (16,217 | ) | | (14,236 | ) | | (11,581 | ) |
Other corporate expenses, net | (5,803 | ) | | (5,108 | ) | | (4,706 | ) |
Total operating income | $ | 63,930 |
| | $ | 70,898 |
| | $ | 61,344 |
|
The U.S. and China were the only countries that accounted for more than 10% of the Company’s net sales in 2019, 2018 and 2017. There was no single customer that accounted for more than 10% of net sales in 2019, 2018 and 2017. Net sales for 2019, 2018 and 2017 and long-lived assets as of September 28, 2019 and September 29, 2018 were as follows (in millions):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Net sales: | | | | | |
U.S. | $ | 102,266 |
| | $ | 98,061 |
| | $ | 84,339 |
|
China (1) | 43,678 |
| | 51,942 |
| | 44,764 |
|
Other countries | 114,230 |
| | 115,592 |
| | 100,131 |
|
Total net sales | $ | 260,174 |
|
| $ | 265,595 |
|
| $ | 229,234 |
|
|
| | | | | | | |
| 2019 | | 2018 |
Long-lived assets: | | | |
U.S. | $ | 24,711 |
| | $ | 23,963 |
|
China (1) | 9,064 |
| | 13,268 |
|
Other countries | 3,603 |
| | 4,073 |
|
Total long-lived assets | $ | 37,378 |
| | $ | 41,304 |
|
| |
(1) | China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets related to retail stores and related infrastructure. |
Apple Inc. | 2019 Form 10-K | 54
Note 12 – Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Company’s quarterly financial information for each of the four quarters of 2019 and 2018 (in millions, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
2019: | | | | | | | |
Total net sales | $ | 64,040 |
| | $ | 53,809 |
| | $ | 58,015 |
| | $ | 84,310 |
|
Gross margin | $ | 24,313 |
| | $ | 20,227 |
| | $ | 21,821 |
| | $ | 32,031 |
|
Net income | $ | 13,686 |
| | $ | 10,044 |
| | $ | 11,561 |
| | $ | 19,965 |
|
| | | | | | | |
Earnings per share (1): | | | | | | | |
Basic | $ | 3.05 |
| | $ | 2.20 |
| | $ | 2.47 |
| | $ | 4.22 |
|
Diluted | $ | 3.03 |
| | $ | 2.18 |
| | $ | 2.46 |
| | $ | 4.18 |
|
|
| | | | | | | | | | | | | | | |
| Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
2018: | | | | | | | |
Total net sales | $ | 62,900 |
| | $ | 53,265 |
| | $ | 61,137 |
| | $ | 88,293 |
|
Gross margin | $ | 24,084 |
| | $ | 20,421 |
| | $ | 23,422 |
| | $ | 33,912 |
|
Net income | $ | 14,125 |
| | $ | 11,519 |
| | $ | 13,822 |
| | $ | 20,065 |
|
| | | | | | | |
Earnings per share (1): | | | | | | | |
Basic | $ | 2.94 |
| | $ | 2.36 |
| | $ | 2.75 |
| | $ | 3.92 |
|
Diluted | $ | 2.91 |
| | $ | 2.34 |
| | $ | 2.73 |
| | $ | 3.89 |
|
| |
(1) | Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share. |
Apple Inc. | 2019 Form 10-K | 55
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 28, 2019 and September 29, 2018, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 28, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Apple Inc. at September 28, 2019 and September 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 28, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), Apple Inc.’s internal control over financial reporting as of September 28, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 30, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of Apple Inc.’s management. Our responsibility is to express an opinion on Apple Inc.’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
|
| |
| European Commission State Aid Matter Uncertain Tax Position |
Description of the Matter | As discussed in Note 5 of the financial statements, the European Commission (“EC”) has announced its decision that Ireland granted state aid to Apple Inc. by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of Apple Inc. The decision ordered Ireland to calculate and recover additional taxes from Apple Inc. for the period from June 2003 through December 2014. The adjusted amount indicated by the EC to be recovered is up to €12.9 billion, plus interest. Auditing management’s evaluation of the uncertain tax position stemming from the effects of the EC decision is complex and highly judgmental due to the inherent uncertainty in predicting the ultimate resolution of the matter. |
Apple Inc. | 2019 Form 10-K | 56
|
| |
How We Addressed the Matter in Our Audit | We tested controls over the risk of material misstatement relating to the evaluation of the EC state aid matter, including management’s evaluation of the advice of legal counsel, the assessment as to whether Apple Inc.’s position is more likely than not to be sustained and the development of the related disclosure. To evaluate Apple Inc.’s assessment of whether sustainment of its position is a more likely than not outcome, including underlying assumptions, our audit procedures included, among others, reading the EC August 2016 ruling and available correspondence between Apple Inc. and the EC, and the EC and Ireland. We also requested and received internal and external legal counsel confirmation letters, discussed the allegations with internal and external legal counsel and Apple Inc. tax personnel and obtained a representation letter from Apple Inc. We involved our EC and tax subject matter resources in considering the applicable tax laws, the pending appeal, the current status of legal precedent relevant to that appeal and the proceedings at the court hearing in September 2019. In addition, we evaluated Apple Inc.’s disclosure included in Note 5 in relation to this matter. |
/s/ Ernst & Young LLP
We have served as Apple Inc.’s auditor since 2009.
San Jose, California
October 30, 2019
Apple Inc. | 2019 Form 10-K | 57
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Apple Inc.’s internal control over financial reporting as of September 28, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 28, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of Apple Inc. as of September 28, 2019 and September 29, 2018, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 28, 2019, and the related notes and our report dated October 30, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
Apple Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Apple Inc.’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
October 30, 2019
Apple Inc. | 2019 Form 10-K | 58
| |
Item 8. | Financial Statements and Supplementary Data |
|
| | |
Index to Consolidated Financial Statements | | Page |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
Apple Inc. | 2018 Form 10-K | 37
Apple Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
|
| | | | | | | | | | | |
| Years ended |
| September 29, 2018 | | September 30, 2017 | | September 24, 2016 |
Net sales | $ | 265,595 |
| | $ | 229,234 |
| | $ | 215,639 |
|
Cost of sales | 163,756 |
| | 141,048 |
| | 131,376 |
|
Gross margin | 101,839 |
|
| 88,186 |
|
| 84,263 |
|
| | | | | |
Operating expenses: | | | | | |
Research and development | 14,236 |
| | 11,581 |
| | 10,045 |
|
Selling, general and administrative | 16,705 |
| | 15,261 |
| | 14,194 |
|
Total operating expenses | 30,941 |
|
| 26,842 |
|
| 24,239 |
|
| | | | | |
Operating income | 70,898 |
| | 61,344 |
| | 60,024 |
|
Other income/(expense), net | 2,005 |
| | 2,745 |
| | 1,348 |
|
Income before provision for income taxes | 72,903 |
|
| 64,089 |
|
| 61,372 |
|
Provision for income taxes | 13,372 |
| | 15,738 |
| | 15,685 |
|
Net income | $ | 59,531 |
|
| $ | 48,351 |
|
| $ | 45,687 |
|
| | | | | |
Earnings per share: | | | | | |
Basic | $ | 12.01 |
| | $ | 9.27 |
| | $ | 8.35 |
|
Diluted | $ | 11.91 |
| | $ | 9.21 |
| | $ | 8.31 |
|
| | | | | |
Shares used in computing earnings per share: | | | | | |
Basic | 4,955,377 |
| | 5,217,242 |
| | 5,470,820 |
|
Diluted | 5,000,109 |
| | 5,251,692 |
| | 5,500,281 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2018 Form 10-K | 38
Apple Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
| | | | | | | | | | | |
| Years ended |
| September 29, 2018 | | September 30, 2017 | | September 24, 2016 |
Net income | $ | 59,531 |
| | $ | 48,351 |
| | $ | 45,687 |
|
Other comprehensive income/(loss): | | | | | |
Change in foreign currency translation, net of tax effects of $(1), $(77) and $8, respectively | (525 | ) | | 224 |
| | 75 |
|
| | | | | |
Change in unrealized gains/losses on derivative instruments: | | | | | |
Change in fair value of derivatives, net of tax benefit/(expense) of $(149), $(478) and $(7), respectively | 523 |
| | 1,315 |
| | 7 |
|
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(104), $475 and $131, respectively | 382 |
| | (1,477 | ) | | (741 | ) |
Total change in unrealized gains/losses on derivative instruments, net of tax | 905 |
|
| (162 | ) |
| (734 | ) |
| | | | | |
Change in unrealized gains/losses on marketable securities: | | | | | |
Change in fair value of marketable securities, net of tax benefit/(expense) of $1,156, $425 and $(863), respectively | (3,407 | ) | | (782 | ) | | 1,582 |
|
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $21, $35 and $(31), respectively | 1 |
| | (64 | ) | | 56 |
|
Total change in unrealized gains/losses on marketable securities, net of tax | (3,406 | ) |
| (846 | ) |
| 1,638 |
|
| | | | | |
Total other comprehensive income/(loss) | (3,026 | ) |
| (784 | ) |
| 979 |
|
Total comprehensive income | $ | 56,505 |
|
| $ | 47,567 |
|
| $ | 46,666 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2018 Form 10-K | 39
Apple Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
|
| | | | | | | |
| September 29, 2018 | | September 30, 2017 |
ASSETS: |
Current assets: | | | |
Cash and cash equivalents | $ | 25,913 |
| | $ | 20,289 |
|
Marketable securities | 40,388 |
| | 53,892 |
|
Accounts receivable, net | 23,186 |
| | 17,874 |
|
Inventories | 3,956 |
| | 4,855 |
|
Vendor non-trade receivables | 25,809 |
| | 17,799 |
|
Other current assets | 12,087 |
| | 13,936 |
|
Total current assets | 131,339 |
| | 128,645 |
|
| | | |
Non-current assets: | | | |
Marketable securities | 170,799 |
| | 194,714 |
|
Property, plant and equipment, net | 41,304 |
| | 33,783 |
|
Other non-current assets | 22,283 |
| | 18,177 |
|
Total non-current assets | 234,386 |
| | 246,674 |
|
Total assets | $ | 365,725 |
| | $ | 375,319 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY: |
Current liabilities: | | | |
Accounts payable | $ | 55,888 |
| | $ | 44,242 |
|
Other current liabilities | 32,687 |
| | 30,551 |
|
Deferred revenue | 7,543 |
| | 7,548 |
|
Commercial paper | 11,964 |
| | 11,977 |
|
Term debt | 8,784 |
| | 6,496 |
|
Total current liabilities | 116,866 |
| | 100,814 |
|
| | | |
Non-current liabilities: | | | |
Deferred revenue | 2,797 |
| | 2,836 |
|
Term debt | 93,735 |
| | 97,207 |
|
Other non-current liabilities | 45,180 |
| | 40,415 |
|
Total non-current liabilities | 141,712 |
| | 140,458 |
|
Total liabilities | 258,578 |
| | 241,272 |
|
| | | |
Commitments and contingencies |
| |
|
| | | |
Shareholders’ equity: | | | |
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,754,986 and 5,126,201 shares issued and outstanding, respectively | 40,201 |
| | 35,867 |
|
Retained earnings | 70,400 |
| | 98,330 |
|
Accumulated other comprehensive income/(loss) | (3,454 | ) | | (150 | ) |
Total shareholders’ equity | 107,147 |
| | 134,047 |
|
Total liabilities and shareholders’ equity | $ | 365,725 |
|
| $ | 375,319 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2018 Form 10-K | 40
Apple Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except number of shares which are reflected in thousands and per share amounts)
|
| | | | | | | | | | | | | | | | | | |
| Common Stock and Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Total Shareholders’ Equity |
| Shares | | Amount | |
Balances as of September 26, 2015 | 5,578,753 |
| | $ | 27,416 |
| | $ | 92,284 |
| | $ | (345 | ) | | $ | 119,355 |
|
Net income | — |
| | — |
| | 45,687 |
| | — |
| | 45,687 |
|
Other comprehensive income/(loss) | — |
| | — |
| | — |
| | 979 |
| | 979 |
|
Dividends and dividend equivalents declared at $2.18 per share or RSU | — |
| | — |
| | (12,188 | ) | | — |
| | (12,188 | ) |
Repurchase of common stock | (279,609 | ) | | — |
| | (29,000 | ) | | — |
| | (29,000 | ) |
Share-based compensation | — |
| | 4,262 |
| | — |
| | — |
| | 4,262 |
|
Common stock issued, net of shares withheld for employee taxes | 37,022 |
| | (806 | ) | | (419 | ) | | — |
| | (1,225 | ) |
Tax benefit from equity awards, including transfer pricing adjustments | — |
| | 379 |
| | — |
| | — |
| | 379 |
|
Balances as of September 24, 2016 | 5,336,166 |
| | 31,251 |
| | 96,364 |
| | 634 |
| | 128,249 |
|
Net income | — |
| | — |
| | 48,351 |
| | — |
| | 48,351 |
|
Other comprehensive income/(loss) | — |
| | — |
| | — |
| | (784 | ) | | (784 | ) |
Dividends and dividend equivalents declared at $2.40 per share or RSU | — |
| | — |
| | (12,803 | ) | | — |
| | (12,803 | ) |
Repurchase of common stock | (246,496 | ) | | — |
| | (33,001 | ) | | — |
| | (33,001 | ) |
Share-based compensation | — |
| | 4,909 |
| | — |
| | — |
| | 4,909 |
|
Common stock issued, net of shares withheld for employee taxes | 36,531 |
| | (913 | ) | | (581 | ) | | — |
| | (1,494 | ) |
Tax benefit from equity awards, including transfer pricing adjustments | — |
| | 620 |
| | — |
| | — |
| | 620 |
|
Balances as of September 30, 2017 | 5,126,201 |
| | 35,867 |
| | 98,330 |
| | (150 | ) | | 134,047 |
|
Cumulative effect of change in accounting principle | — |
| | — |
| | 278 |
| | (278 | ) | | — |
|
Net income | — |
| | — |
| | 59,531 |
| | — |
| | 59,531 |
|
Other comprehensive income/(loss) | — |
| | — |
| | — |
| | (3,026 | ) | | (3,026 | ) |
Dividends and dividend equivalents declared at $2.72 per share or RSU | — |
| | — |
| | (13,735 | ) | | — |
| | (13,735 | ) |
Repurchase of common stock | (405,549 | ) | | — |
| | (73,056 | ) | | — |
| | (73,056 | ) |
Share-based compensation | — |
| | 5,443 |
| | — |
| | — |
| | 5,443 |
|
Common stock issued, net of shares withheld for employee taxes | 34,334 |
| | (1,109 | ) | | (948 | ) | | — |
| | (2,057 | ) |
Balances as of September 29, 2018 | 4,754,986 |
| | $ | 40,201 |
| | $ | 70,400 |
| | $ | (3,454 | ) | | $ | 107,147 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2018 Form 10-K | 41
Apple Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) |
| | | | | | | | | | | |
| Years ended |
| September 29, 2018 | | September 30, 2017 | | September 24, 2016 |
Cash and cash equivalents, beginning of the year | $ | 20,289 |
| | $ | 20,484 |
| | $ | 21,120 |
|
Operating activities: | | | | | |
Net income | 59,531 |
| | 48,351 |
| | 45,687 |
|
Adjustments to reconcile net income to cash generated by operating activities: | | | | | |
Depreciation and amortization | 10,903 |
| | 10,157 |
| | 10,505 |
|
Share-based compensation expense | 5,340 |
| | 4,840 |
| | 4,210 |
|
Deferred income tax expense/(benefit) | (32,590 | ) | | 5,966 |
| | 4,938 |
|
Other | (444 | ) | | (166 | ) | | 486 |
|
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net | (5,322 | ) | | (2,093 | ) | | 527 |
|
Inventories | 828 |
| | (2,723 | ) | | 217 |
|
Vendor non-trade receivables | (8,010 | ) | | (4,254 | ) | | (51 | ) |
Other current and non-current assets | (423 | ) | | (5,318 | ) | | 1,055 |
|
Accounts payable | 9,175 |
| | 8,966 |
| | 2,117 |
|
Deferred revenue | (44 | ) | | (626 | ) | | (1,554 | ) |
Other current and non-current liabilities | 38,490 |
| | 1,125 |
| | (1,906 | ) |
Cash generated by operating activities | 77,434 |
|
| 64,225 |
|
| 66,231 |
|
Investing activities: | | | | | |
Purchases of marketable securities | (71,356 | ) | | (159,486 | ) | | (142,428 | ) |
Proceeds from maturities of marketable securities | 55,881 |
| | 31,775 |
| | 21,258 |
|
Proceeds from sales of marketable securities | 47,838 |
| | 94,564 |
| | 90,536 |
|
Payments for acquisition of property, plant and equipment | (13,313 | ) | | (12,451 | ) | | (12,734 | ) |
Payments made in connection with business acquisitions, net | (721 | ) | | (329 | ) | | (297 | ) |
Purchases of non-marketable securities | (1,871 | ) | | (521 | ) | | (1,388 | ) |
Proceeds from non-marketable securities | 353 |
| | 126 |
| | — |
|
Other | (745 | ) | | (124 | ) | | (924 | ) |
Cash generated by/(used in) investing activities | 16,066 |
|
| (46,446 | ) |
| (45,977 | ) |
Financing activities: | | | | | |
Proceeds from issuance of common stock | 669 |
| | 555 |
| | 495 |
|
Payments for taxes related to net share settlement of equity awards | (2,527 | ) | | (1,874 | ) | | (1,570 | ) |
Payments for dividends and dividend equivalents | (13,712 | ) | | (12,769 | ) | | (12,150 | ) |
Repurchases of common stock | (72,738 | ) | | (32,900 | ) | | (29,722 | ) |
Proceeds from issuance of term debt, net | 6,969 |
| | 28,662 |
| | 24,954 |
|
Repayments of term debt | (6,500 | ) | | (3,500 | ) | | (2,500 | ) |
Change in commercial paper, net | (37 | ) | | 3,852 |
| | (397 | ) |
Cash used in financing activities | (87,876 | ) |
| (17,974 | ) |
| (20,890 | ) |
Increase/(Decrease) in cash and cash equivalents | 5,624 |
| | (195 | ) | | (636 | ) |
Cash and cash equivalents, end of the year | $ | 25,913 |
|
| $ | 20,289 |
|
| $ | 20,484 |
|
Supplemental cash flow disclosure: | | | | | |
Cash paid for income taxes, net | $ | 10,417 |
| | $ | 11,591 |
| | $ | 10,444 |
|
Cash paid for interest | $ | 3,022 |
| | $ | 2,092 |
| | $ | 1,316 |
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2018 Form 10-K | 42
Apple Inc.
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures and markets mobile communication and media devices and personal computers, and sells a variety of related software, services, accessories and third-party digital content and applications. The Company’s products and services include iPhone, iPad, Mac, Apple Watch, AirPods, Apple TV, HomePod, a portfolio of consumer and professional software applications, iOS, macOS, watchOS and tvOS operating systems, iCloud, Apple Pay and a variety of other accessory, service and support offerings. The Company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, Book Store and Apple Music (collectively “Digital Content and Services”). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including application software and various accessories, through its retail and online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
Basis of Presentation and Preparation
The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation.
The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2018 and 2016 spanned 52 weeks each, whereas fiscal year 2017 included 53 weeks. A 14th week was included in the first fiscal quarter of 2017, as is done every five or six years, to realign the Company’s fiscal quarters with calendar quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. For payment terms in excess of the Company’s standard payment terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.
For the sale of most third-party products, the Company recognizes revenue based on the gross amount billed to customers because the Company establishes its own pricing for such products, retains related inventory risk for physical products, is the primary obligor to the customer and assumes the credit risk for amounts billed to its customers. For third-party applications sold through the App Store and Mac App Store and certain digital content sold through the iTunes Store, the Company does not determine the selling price of the products and is not the primary obligor to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in net sales only the commission it retains from each sale. The portion of the gross amount billed to customers that is remitted by the Company to third-party app developers and certain digital content owners is not reflected in the Company’s Consolidated Statements of Operations.
Apple Inc. | 2018 Form 10-K | 43
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts that have been deferred for unspecified and specified software upgrade rights and non-software services that are attached to hardware and software products. The Company sells gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on iTunes Store, App Store, Mac App Store, TV App Store and Book Store for the purchase of digital content and software. The Company records deferred revenue upon the sale of the card, which is relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage periods. AppleCare service and support contracts typically include extended phone support, repair services, web-based support resources and diagnostic tools offered under the Company’s standard limited warranty.
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded. For the Company’s other customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the Company’s historical experience. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Revenue Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element arrangements accounted for in accordance with industry-specific software accounting guidance, the Company allocates revenue to all deliverables based on the VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.
For sales of iPhone, iPad, Mac and certain other products, the Company has indicated it may from time to time provide future unspecified software upgrades to the device’s essential software and/or non-software services free of charge. The Company has identified up to three deliverables regularly included in arrangements involving the sale of these devices. The first deliverable, which represents the substantial portion of the allocated sales price, is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with qualifying devices to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the product’s essential software. The third deliverable is the non-software services to be provided to qualifying devices. The Company allocates revenue between these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue is based on the Company’s ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale, provided the other conditions for revenue recognition have been met. Revenue allocated to the embedded unspecified software upgrade rights and the non-software services is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided. Cost of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-software services are recognized as cost of sales as incurred, and engineering and sales and marketing costs are recognized as operating expenses as incurred.
The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable including, where applicable, prices charged by the Company and market trends in the pricing for similar offerings, product-specific business objectives, estimated cost to provide the non-software services and the relative ESP of the upgrade rights and non-software services as compared to the total selling price of the product.
Shipping Costs
Amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s shipping and handling costs are classified as cost of sales.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses.
Apple Inc. | 2018 Form 10-K | 44
Share-Based Compensation
The Company generally measures share-based compensation based on the closing price of the Company’s common stock on the date of grant, and recognizes expense on a straight-line basis for its estimate of equity awards that will ultimately vest. Further information regarding share-based compensation can be found in Note 8, “Benefit Plans.”
During the first quarter of 2018, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which modified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. Historically, excess tax benefits or deficiencies from the Company’s equity awards were recorded as additional paid-in capital in its Consolidated Balance Sheets and were classified as a financing activity in its Consolidated Statements of Cash Flows. Beginning in 2018, the Company records any excess tax benefits or deficiencies from its equity awards as part of the provision for income taxes in its Consolidated Statements of Operations in the reporting periods in which equity vesting occurs. The Company elected to apply the cash flow classification requirements related to excess tax benefits retrospectively to all periods presented, which resulted in an increase to cash generated by operating activities in the Consolidated Statements of Cash Flows of $627 million and $407 million for 2017 and 2016, respectively.
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for 2018, 2017 and 2016 (net income in millions and shares in thousands):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Numerator: | | | | | |
Net income | $ | 59,531 |
| | $ | 48,351 |
| | $ | 45,687 |
|
| | | | | |
Denominator: | | | | | |
Weighted-average basic shares outstanding | 4,955,377 |
| | 5,217,242 |
| | 5,470,820 |
|
Effect of dilutive securities | 44,732 |
| | 34,450 |
| | 29,461 |
|
Weighted-average diluted shares | 5,000,109 |
| | 5,251,692 |
|
| 5,500,281 |
|
| | | | | |
Basic earnings per share | $ | 12.01 |
| | $ | 9.27 |
| | $ | 8.35 |
|
Diluted earnings per share | $ | 11.91 |
| | $ | 9.21 |
| | $ | 8.31 |
|
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s marketable debt and equity securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable equity securities, including mutual funds, are classified as short-term based on the nature of the securities and their availability for use in current operations. The cost of securities sold is determined using the specific identification method.
Inventories
Inventories are computed using the first-in, first-out method.
Property, Plant and Equipment
Depreciation on property, plant and equipment is recognized on a straight-line basis over the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building; between one and five years for machinery and equipment, including product tooling and manufacturing process equipment; and the shorter of lease term or useful life for leasehold improvements. Capitalized costs related to internal-use software are amortized on a straight-line basis over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization expense on property and equipment was $9.3 billion, $8.2 billion and $8.3 billion during 2018, 2017 and 2016, respectively.
During 2018, non-cash investing activities involving property, plant and equipment resulted in a net increase to accounts payable and other current liabilities of $3.4 billion.
Apple Inc. | 2018 Form 10-K | 45
Fair Value Measurements
The Company’s valuation techniques used to measure the fair value of money market funds and certain marketable equity securities are derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, which generally have counterparties with high credit ratings, are based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.
Note 2 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company’s cash and available-for-sale securities by significant investment category as of September 29, 2018 and September 30, 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities | | Long-Term Marketable Securities |
Cash | $ | 11,575 |
| | $ | — |
| | $ | — |
| | $ | 11,575 |
| | $ | 11,575 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | |
Level 1 (1): | | | | | | | | | | | | | |
Money market funds | 8,083 |
| | — |
| | — |
| | 8,083 |
| | 8,083 |
| | — |
| | — |
|
Mutual funds | 799 |
| | — |
| | (116 | ) | | 683 |
| | — |
| | 683 |
| | — |
|
Subtotal | 8,882 |
| | — |
| | (116 | ) | | 8,766 |
| | 8,083 |
| | 683 |
| | — |
|
| | | | | | | | | | | | | |
Level 2 (2): | | | | | | | | | | | | | |
U.S. Treasury securities | 47,296 |
| | — |
| | (1,202 | ) | | 46,094 |
| | 1,613 |
| | 7,606 |
| | 36,875 |
|
U.S. agency securities | 4,127 |
| | — |
| | (48 | ) | | 4,079 |
| | 1,732 |
| | 360 |
| | 1,987 |
|
Non-U.S. government securities | 21,601 |
| | 49 |
| | (250 | ) | | 21,400 |
| | — |
| | 3,355 |
| | 18,045 |
|
Certificates of deposit and time deposits | 3,074 |
| | — |
| | — |
| | 3,074 |
| | 1,247 |
| | 1,330 |
| | 497 |
|
Commercial paper | 2,573 |
| | — |
| | — |
| | 2,573 |
| | 1,663 |
| | 910 |
| | — |
|
Corporate securities | 123,001 |
| | 152 |
| | (2,038 | ) | | 121,115 |
| | — |
| | 25,162 |
| | 95,953 |
|
Municipal securities | 946 |
| | — |
| | (12 | ) | | 934 |
| | — |
| | 178 |
| | 756 |
|
Mortgage- and asset-backed securities | 18,105 |
| | 8 |
| | (623 | ) | | 17,490 |
| | — |
| | 804 |
| | 16,686 |
|
Subtotal | 220,723 |
| | 209 |
| | (4,173 | ) | | 216,759 |
| | 6,255 |
| | 39,705 |
| | 170,799 |
|
| | | | | | | | | | | | | |
Total (3) | $ | 241,180 |
| | $ | 209 |
| | $ | (4,289 | ) | | $ | 237,100 |
| | $ | 25,913 |
| | $ | 40,388 |
| | $ | 170,799 |
|
Apple Inc. | 2018 Form 10-K | 46
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 |
| Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities | | Long-Term Marketable Securities |
Cash | $ | 7,982 |
| | $ | — |
| | $ | — |
| | $ | 7,982 |
| | $ | 7,982 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | |
Level 1 (1): | | | | | | | | | | | | | |
Money market funds | 6,534 |
| | — |
| | — |
| | 6,534 |
| | 6,534 |
| | — |
| | — |
|
Mutual funds | 799 |
| | — |
| | (88 | ) | | 711 |
| | — |
| | 711 |
| | — |
|
Subtotal | 7,333 |
| | — |
| | (88 | ) | | 7,245 |
| | 6,534 |
| | 711 |
| | — |
|
| | | | | | | | | | | | | |
Level 2 (2): | | | | | | | | | | | | | |
U.S. Treasury securities | 55,254 |
| | 58 |
| | (230 | ) | | 55,082 |
| | 865 |
| | 17,228 |
| | 36,989 |
|
U.S. agency securities | 5,162 |
| | 2 |
| | (9 | ) | | 5,155 |
| | 1,439 |
| | 2,057 |
| | 1,659 |
|
Non-U.S. government securities | 7,827 |
| | 210 |
| | (37 | ) | | 8,000 |
| | 9 |
| | 123 |
| | 7,868 |
|
Certificates of deposit and time deposits | 5,832 |
| | — |
| | — |
| | 5,832 |
| | 1,142 |
| | 3,918 |
| | 772 |
|
Commercial paper | 3,640 |
| | — |
| | — |
| | 3,640 |
| | 2,146 |
| | 1,494 |
| | — |
|
Corporate securities | 152,724 |
| | 969 |
| | (242 | ) | | 153,451 |
| | 172 |
| | 27,591 |
| | 125,688 |
|
Municipal securities | 961 |
| | 4 |
| | (1 | ) | | 964 |
| | — |
| | 114 |
| | 850 |
|
Mortgage- and asset-backed securities | 21,684 |
| | 35 |
| | (175 | ) | | 21,544 |
| | — |
| | 656 |
| | 20,888 |
|
Subtotal | 253,084 |
| | 1,278 |
| | (694 | ) | | 253,668 |
| | 5,773 |
| | 53,181 |
| | 194,714 |
|
| | | | | | | | | | | | | |
Total | $ | 268,399 |
| | $ | 1,278 |
| | $ | (782 | ) | | $ | 268,895 |
| | $ | 20,289 |
| | $ | 53,892 |
| | $ | 194,714 |
|
| |
(1) | Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities. |
| |
(2) | Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
(3) | As of September 29, 2018, total cash, cash equivalents and marketable securities included $20.3 billion that was restricted from general use, related to the State Aid Decision (refer to Note 4, “Income Taxes”) and other agreements. |
The Company may sell certain of its marketable securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. The maturities of the Company’s long-term marketable securities generally range from one to five years.
The following tables show information about the Company’s marketable securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or greater as of September 29, 2018 and September 30, 2017 (in millions):
|
| | | | | | | | | | | |
| 2018 |
| Continuous Unrealized Losses |
| Less than 12 Months | | 12 Months or Greater | | Total |
Fair value of marketable securities | $ | 126,238 |
| | $ | 60,599 |
| | $ | 186,837 |
|
Unrealized losses | $ | (2,400 | ) | | $ | (1,889 | ) | | $ | (4,289 | ) |
|
| | | | | | | | | | | |
| 2017 |
| Continuous Unrealized Losses |
| Less than 12 Months | | 12 Months or Greater | | Total |
Fair value of marketable securities | $ | 101,986 |
| | $ | 8,290 |
| | $ | 110,276 |
|
Unrealized losses | $ | (596 | ) | | $ | (186 | ) | | $ | (782 | ) |
Apple Inc. | 2018 Form 10-K | 47
The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. As of September 29, 2018, the Company does not consider any of its investments to be other-than-temporarily impaired.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, net investments in certain foreign subsidiaries, and certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.
To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To protect the net investment in a foreign operation from fluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such as its foreign currency–denominated debt, as hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value. The Company may designate these instruments as either cash flow or fair value hedges. As of September 29, 2018, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 24 years.
The Company may also enter into non-designated foreign currency contracts to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.
To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. These instruments may offset a portion of the changes in interest income or expense, or changes in fair value. The Company designates these instruments as either cash flow or fair value hedges. As of September 29, 2018, the Company’s hedged interest rate transactions are expected to be recognized within 9 years.
Cash Flow Hedges
The effective portions of cash flow hedges are recorded in accumulated other comprehensive income/(loss) (“AOCI”) until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in other income/(expense), net in the same period as the related income or expense is recognized. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. The ineffective portions and amounts excluded from the effectiveness testing of cash flow hedges are recognized in other income/(expense), net.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into other income/(expense), net in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in other income/(expense), net unless they are re-designated as hedges of other transactions.
Apple Inc. | 2018 Form 10-K | 48
Net Investment Hedges
The effective portions of net investment hedges are recorded in other comprehensive income/(loss) (“OCI”) as a part of the cumulative translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment hedges are recognized in other income/(expense), net. For forward exchange contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this forward carry component are recognized in earnings in the current period.
Fair Value Hedges
Gains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related to the change in value of the underlying hedged item in the same line in the Consolidated Statements of Operations.
Non-Designated Derivatives
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates. As a result, during 2018, the Company recognized a gain of $20 million in net sales, a gain of $85 million in cost of sales and a loss of $198 million in other income/(expense), net. During 2017, the Company recognized a gain of $20 million in net sales, a loss of $40 million in cost of sales and a gain of $606 million in other income/(expense), net.
The Company records all derivatives in the Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value as of September 29, 2018 and September 30, 2017 (in millions):
|
| | | | | | | | | | | |
| 2018 |
| Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value |
Derivative assets (1): | | | | | |
Foreign exchange contracts | $ | 1,015 |
| | $ | 259 |
| | $ | 1,274 |
|
| | | | | |
Derivative liabilities (2): | | | | | |
Foreign exchange contracts | $ | 543 |
| | $ | 137 |
| | $ | 680 |
|
Interest rate contracts | $ | 1,456 |
| | $ | — |
| | $ | 1,456 |
|
|
| | | | | | | | | | | |
| 2017 |
| Fair Value of Derivatives Designated as Hedge Instruments | | Fair Value of Derivatives Not Designated as Hedge Instruments | | Total Fair Value |
Derivative assets (1): | | | | | |
Foreign exchange contracts | $ | 1,049 |
| | $ | 363 |
| | $ | 1,412 |
|
Interest rate contracts | $ | 218 |
| | $ | — |
| | $ | 218 |
|
| | | | | |
Derivative liabilities (2): | | | | | |
Foreign exchange contracts | $ | 759 |
| | $ | 501 |
| | $ | 1,260 |
|
Interest rate contracts | $ | 303 |
| | $ | — |
| | $ | 303 |
|
| |
(1) | The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets and other non-current assets in the Consolidated Balance Sheets. |
| |
(2) | The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as other current liabilities and other non-current liabilities in the Consolidated Balance Sheets. |
The Company classifies cash flows related to derivative financial instruments as operating activities in its Consolidated Statements of Cash Flows.
Apple Inc. | 2018 Form 10-K | 49
The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow, net investment and fair value hedges in OCI and the Consolidated Statements of Operations for 2018, 2017 and 2016 (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Gains/(Losses) recognized in OCI – effective portion: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange contracts | $ | 682 |
| | $ | 1,797 |
| | $ | 109 |
|
Interest rate contracts | 1 |
| | 7 |
| | (57 | ) |
Total | $ | 683 |
|
| $ | 1,804 |
|
| $ | 52 |
|
| | | | | |
Net investment hedges: | | | | | |
Foreign currency debt | $ | 4 |
| | $ | 67 |
| | $ | (258 | ) |
| | | | | |
Gains/(Losses) reclassified from AOCI into net income – effective portion: | | | | | |
Cash flow hedges: | | | | | |
Foreign exchange contracts | $ | (482 | ) | | $ | 1,958 |
| | $ | 885 |
|
Interest rate contracts | 1 |
| | (2 | ) | | (11 | ) |
Total | $ | (481 | ) |
| $ | 1,956 |
|
| $ | 874 |
|
| | | | | |
Gains/(Losses) on derivative instruments: | | | | | |
Fair value hedges: | | | | | |
Foreign exchange contracts | $ | (168 | ) | | $ | — |
| | $ | — |
|
Interest rate contracts | (1,363 | ) | | (810 | ) | | 341 |
|
Total | $ | (1,531 | ) | | $ | (810 | ) | | $ | 341 |
|
| | | | | |
Gains/(Losses) related to hedged items: | | | | | |
Fair value hedges: | | | | | |
Marketable securities | $ | 167 |
| | $ | — |
| | $ | — |
|
Fixed-rate debt | 1,363 |
| | 810 |
| | (341 | ) |
Total | $ | 1,530 |
| | $ | 810 |
| | $ | (341 | ) |
The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 29, 2018 and September 30, 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| 2018 | | 2017 |
| Notional Amount | | Credit Risk Amount | | Notional Amount | | Credit Risk Amount |
Instruments designated as accounting hedges: | | | | | | | |
Foreign exchange contracts | $ | 65,368 |
| | $ | 1,015 |
| | $ | 56,156 |
| | $ | 1,049 |
|
Interest rate contracts | $ | 33,250 |
| | $ | — |
| | $ | 33,000 |
| | $ | 218 |
|
| | | | | | | |
Instruments not designated as accounting hedges: | | | | | | | |
Foreign exchange contracts | $ | 63,062 |
| | $ | 259 |
| | $ | 69,774 |
| | $ | 363 |
|
The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
Apple Inc. | 2018 Form 10-K | 50
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. As of September 29, 2018, the net cash collateral posted by the Company related to derivative instruments under its collateral security arrangements was $1.0 billion, which was recorded as other current assets in the Condensed Consolidated Balance Sheet. As of September 30, 2017, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $35 million, which was recorded as other current liabilities in the Consolidated Balance Sheet.
Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. As of September 29, 2018 and September 30, 2017, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $2.1 billion and $1.4 billion, respectively, resulting in net derivative assets of $138 million and $32 million, respectively.
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of September 29, 2018, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 10%. As of September 30, 2017, the Company had two customers that individually represented 10% or more of total trade receivables, each of which accounted for 10%. The Company’s cellular network carriers accounted for 59% of total trade receivables as of both September 29, 2018 and September 30, 2017.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of September 29, 2018, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 62% and 12%. As of September 30, 2017, the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 42%, 19% and 10%.
Note 3 – Consolidated Financial Statement Details
The following tables show the Company’s consolidated financial statement details as of September 29, 2018 and September 30, 2017 (in millions):
Property, Plant and Equipment, Net
|
| | | | | | | |
| 2018 | | 2017 |
Land and buildings | $ | 16,216 |
| | $ | 13,587 |
|
Machinery, equipment and internal-use software | 65,982 |
| | 54,210 |
|
Leasehold improvements | 8,205 |
| | 7,279 |
|
Gross property, plant and equipment | 90,403 |
| | 75,076 |
|
Accumulated depreciation and amortization | (49,099 | ) | | (41,293 | ) |
Total property, plant and equipment, net | $ | 41,304 |
| | $ | 33,783 |
|
Apple Inc. | 2018 Form 10-K | 51
Other Non-Current Liabilities
|
| | | | | | | |
| 2018 | | 2017 |
Long-term taxes payable | $ | 33,589 |
| | $ | 257 |
|
Deferred tax liabilities | 426 |
| | 31,504 |
|
Other non-current liabilities | 11,165 |
| | 8,654 |
|
Total other non-current liabilities | $ | 45,180 |
| | $ | 40,415 |
|
Other Income/(Expense), Net
The following table shows the detail of other income/(expense), net for 2018, 2017 and 2016 (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Interest and dividend income | $ | 5,686 |
| | $ | 5,201 |
| | $ | 3,999 |
|
Interest expense | (3,240 | ) | | (2,323 | ) | | (1,456 | ) |
Other expense, net | (441 | ) | | (133 | ) | | (1,195 | ) |
Total other income/(expense), net | $ | 2,005 |
| | $ | 2,745 |
| | $ | 1,348 |
|
Note 4 – Income Taxes
U.S. Tax Cuts and Jobs Act
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The impact of the Act increased the Company’s provision for income taxes by $1.5 billion during 2018. This increase was composed of $2.0 billion related to the remeasurement of net deferred tax assets and liabilities and $1.2 billion associated with the deemed repatriation tax, partially offset by a $1.7 billion impact the deemed repatriation tax had on the Company’s unrecognized tax benefits.
Deferred Tax Balances
As a result of the Act, the Company remeasured certain deferred tax assets and liabilities based on the revised rates at which they are expected to reverse, including items for which the related income tax effects were originally recognized in OCI. In addition, the Company elected to record certain deferred tax assets and liabilities related to the new minimum tax on certain future foreign earnings. Of the $2.0 billion recognized related to the remeasurement of net deferred tax assets and liabilities, $1.2 billion is a provisional estimate that incorporates assumptions based upon the most recent interpretations of the Act and may change as the Company continues to analyze the impact of additional implementation guidance. The Company’s provisional estimates are in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118.
Deemed Repatriation Tax
As of September 30, 2017, the Company had a U.S. deferred tax liability of $36.4 billion for deferred foreign income. During 2018, the Company replaced $36.1 billion of its U.S. deferred tax liability with a deemed repatriation tax payable of $37.3 billion, which was based on the Company’s cumulative post-1986 deferred foreign income. The deemed repatriation tax payable is a provisional estimate that may change as the Company continues to analyze the impact of additional implementation guidance. The Company plans to pay the tax in installments in accordance with the Act.
Adoption of ASU No. 2018-02
During the second quarter of 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allows an entity to elect to reclassify the income tax effects of the Act on items within AOCI to retained earnings. The Company elected to apply the provision of ASU 2018-02 in 2018 with a reclassification of net tax benefits related to cumulative foreign currency translation and unrealized gains/losses on derivative instruments and marketable securities, resulting in a $278 million decrease in AOCI and a corresponding increase in retained earnings in the Consolidated Balance Sheet and Consolidated Statement of Shareholders’ Equity.
Apple Inc. | 2018 Form 10-K | 52
Provision for Income Taxes and Effective Tax Rate
The provision for income taxes for 2018, 2017 and 2016, consisted of the following (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Federal: | | | | | |
Current | $ | 41,425 |
| | $ | 7,842 |
| | $ | 7,652 |
|
Deferred | (33,819 | ) | | 5,980 |
| | 5,043 |
|
Total | 7,606 |
|
| 13,822 |
|
| 12,695 |
|
State: | | | | | |
Current | 551 |
| | 259 |
| | 990 |
|
Deferred | 48 |
| | 2 |
| | (138 | ) |
Total | 599 |
|
| 261 |
|
| 852 |
|
Foreign: | | | | | |
Current | 3,986 |
| | 1,671 |
| | 2,105 |
|
Deferred | 1,181 |
| | (16 | ) | | 33 |
|
Total | 5,167 |
|
| 1,655 |
|
| 2,138 |
|
Provision for income taxes | $ | 13,372 |
|
| $ | 15,738 |
|
| $ | 15,685 |
|
The foreign provision for income taxes is based on foreign pre-tax earnings of $48.0 billion, $44.7 billion and $41.1 billion in 2018, 2017 and 2016, respectively.
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (24.5% in 2018; 35% in 2017 and 2016) to income before provision for income taxes for 2018, 2017 and 2016, is as follows (dollars in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Computed expected tax | $ | 17,890 |
| | $ | 22,431 |
| | $ | 21,480 |
|
State taxes, net of federal effect | 271 |
| | 185 |
| | 553 |
|
Impacts of the Act | 1,515 |
| | — |
| | — |
|
Earnings of foreign subsidiaries | (5,606 | ) | | (6,135 | ) | | (5,582 | ) |
Domestic production activities deduction | (195 | ) | | (209 | ) | | (382 | ) |
Research and development credit, net | (560 | ) | | (678 | ) | | (371 | ) |
Other | 57 |
| | 144 |
| | (13 | ) |
Provision for income taxes | $ | 13,372 |
|
| $ | 15,738 |
|
| $ | 15,685 |
|
Effective tax rate | 18.3 | % | | 24.6 | % | | 25.6 | % |
The Company’s income taxes payable have been reduced by the tax benefits from employee stock plan awards. For restricted stock units (“RSUs”), the Company receives an income tax benefit upon the award’s vesting equal to the tax effect of the underlying stock’s fair market value. Prior to adopting ASU 2016-09 in the first quarter of 2018, the Company reflected net excess tax benefits from equity awards as increases to additional paid-in capital, which amounted to $620 million and $379 million in 2017 and 2016, respectively. Refer to Note 1, “Summary of Significant Accounting Policies” for more information.
Apple Inc. | 2018 Form 10-K | 53
Deferred Tax Assets and Liabilities
As of September 29, 2018 and September 30, 2017, the significant components of the Company’s deferred tax assets and liabilities were (in millions):
|
| | | | | | | |
| 2018 | | 2017 |
Deferred tax assets: | | | |
Accrued liabilities and other reserves | $ | 3,151 |
| | $ | 4,019 |
|
Basis of capital assets | 137 |
| | 1,230 |
|
Deferred revenue | 1,141 |
| | 1,521 |
|
Deferred cost sharing | — |
| | 667 |
|
Share-based compensation | 513 |
| | 703 |
|
Unrealized losses | 871 |
| | — |
|
Other | 797 |
| | 834 |
|
Total deferred tax assets | 6,610 |
| | 8,974 |
|
Deferred tax liabilities: | | | |
Earnings of foreign subsidiaries | 275 |
| | 36,355 |
|
Other | 501 |
| | 207 |
|
Total deferred tax liabilities | 776 |
| | 36,562 |
|
Net deferred tax assets/(liabilities) | $ | 5,834 |
|
| $ | (27,588 | ) |
Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Uncertain Tax Positions
As of September 29, 2018, the total amount of gross unrecognized tax benefits was $9.7 billion, of which $7.4 billion, if recognized, would impact the Company’s effective tax rate. As of September 30, 2017, the total amount of gross unrecognized tax benefits was $8.4 billion, of which $2.5 billion, if recognized, would have impacted the Company’s effective tax rate.
The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2018, 2017 and 2016, is as follows (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Beginning balances | $ | 8,407 |
| | $ | 7,724 |
| | $ | 6,900 |
|
Increases related to tax positions taken during a prior year | 2,431 |
| | 333 |
| | 1,121 |
|
Decreases related to tax positions taken during a prior year | (2,212 | ) | | (952 | ) | | (257 | ) |
Increases related to tax positions taken during the current year | 1,824 |
| | 1,880 |
| | 1,578 |
|
Decreases related to settlements with taxing authorities | (756 | ) | | (539 | ) | | (1,618 | ) |
Decreases related to expiration of statute of limitations | — |
| | (39 | ) | | — |
|
Ending balances | $ | 9,694 |
| | $ | 8,407 |
| | $ | 7,724 |
|
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of September 29, 2018 and September 30, 2017, the total amount of gross interest and penalties accrued was $1.4 billion and $1.2 billion, respectively. Both the unrecognized tax benefits and the associated interest and penalties that are not expected to result in payment or receipt of cash within one year are classified as other non-current liabilities in the Consolidated Balance Sheets. In connection with tax matters, the Company recognized interest and penalty expense in 2018, 2017 and 2016 of $236 million, $165 million and $295 million, respectively.
Apple Inc. | 2018 Form 10-K | 54
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal Revenue Service (the “IRS”) concluded its review of the years 2013 through 2015 in 2018, and all years prior to 2016 are closed. Tax years subsequent to 2006 in certain major U.S. states and subsequent to 2007 in certain major foreign jurisdictions remain open, and could be subject to examination by the taxing authorities. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease (either by payment, release or a combination of both) in the next 12 months by as much as $800 million.
European Commission State Aid Decision
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the Act. As of September 29, 2018, the entire recovery amount plus interest was funded into escrow, where it will remain restricted from general use pending conclusion of all appeals. Refer to Note 2, “Financial Instruments” for more information.
Note 5 – Debt
Commercial Paper
The Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of both September 29, 2018 and September 30, 2017, the Company had $12.0 billion of Commercial Paper outstanding with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 2.18% as of September 29, 2018 and 1.20% as of September 30, 2017. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2018, 2017 and 2016 (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Maturities 90 days or less: | | | | | |
Proceeds from/(Repayments of) commercial paper, net | $ | 1,044 |
| | $ | (1,782 | ) | | $ | (869 | ) |
| | | | | |
Maturities greater than 90 days: | | | | | |
Proceeds from commercial paper | 14,555 |
| | 17,932 |
| | 3,632 |
|
Repayments of commercial paper | (15,636 | ) | | (12,298 | ) | | (3,160 | ) |
Proceeds from/(Repayments of) commercial paper, net | (1,081 | ) |
| 5,634 |
| | 472 |
|
| | | | | |
Total change in commercial paper, net | $ | (37 | ) |
| $ | 3,852 |
| | $ | (397 | ) |
Apple Inc. | 2018 Form 10-K | 55
Term Debt
As of September 29, 2018, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $104.2 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, quarterly for the U.S. dollar–denominated and Australian dollar–denominated floating-rate notes, semi-annually for the U.S. dollar–denominated, Australian dollar–denominated, British pound–denominated, Japanese yen–denominated and Canadian dollar–denominated fixed-rate notes and annually for the euro-denominated and Swiss franc–denominated fixed-rate notes. The following table provides a summary of the Company’s term debt as of September 29, 2018 and September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Maturities (calendar year) | | 2018 | | 2017 |
| Amount (in millions) | | Effective Interest Rate | | Amount (in millions) | | Effective Interest Rate |
2013 debt issuance of $17.0 billion: | | | | | | | | | | | | | | | | | |
Floating-rate notes | | | — | | $ | — |
| | | | | — | % | | $ | 2,000 |
| | | | | 1.10 | % |
Fixed-rate 2.400% – 3.850% notes | 2023 | – | 2043 | | 8,500 |
| | | 2.44% | – | 3.91 | % | | 12,500 |
| | | 1.08% | – | 3.91 | % |
| | | | | | | | | | | | | | | | | |
2014 debt issuance of $12.0 billion: | | | | | | | | | | | | | | | | | |
Floating-rate notes | | | 2019 | | 1,000 |
| | | | | 2.64 | % | | 1,000 |
| | | | | 1.61 | % |
Fixed-rate 2.100% – 4.450% notes | 2019 | – | 2044 | | 8,500 |
| | | 2.64% | – | 4.48 | % | | 8,500 |
| | | 1.61% | – | 4.48 | % |
| | | | | | | | | | | | | | | | | |
2015 debt issuances of $27.3 billion: | | | | | | | | | | | | | | | | | |
Floating-rate notes | 2019 | – | 2020 | | 1,507 |
| | | 1.87% | – | 2.64 | % | | 1,549 |
| | | 1.56% | – | 1.87 | % |
Fixed-rate 0.350% – 4.375% notes | 2019 | – | 2045 | | 24,410 |
| | | 0.28% | – | 4.51 | % | | 24,522 |
| | | 0.28% | – | 4.51 | % |
| | | | | | | | | | | | | | | | | |
2016 debt issuances of $24.9 billion: | | | | | | | | | | | | | | | | | |
Floating-rate notes | 2019 | – | 2021 | | 1,350 |
| | | 2.48% | – | 3.44 | % | | 1,350 |
| | | 1.45% | – | 2.44 | % |
Fixed-rate 1.100% – 4.650% notes | 2019 | – | 2046 | | 23,059 |
| | | 1.13% | – | 4.78 | % | | 23,645 |
| | | 1.13% | – | 4.78 | % |
| | | | | | | | | | | | | | | | | |
2017 debt issuances of $28.7 billion: | | | | | | | | | | | | | | | | | |
Floating-rate notes | 2019 | – | 2022 | | 3,250 |
| | | 2.41% | – | 2.84 | % | | 3,250 |
| | | 1.38% | – | 1.81 | % |
Fixed-rate 0.875% – 4.300% notes | 2019 | – | 2047 | | 25,617 |
| | | 1.54% | – | 4.30 | % | | 25,705 |
| | | 1.51% | – | 4.30 | % |
| | | | | | | | | | | | | | | | | |
First quarter 2018 debt issuance of $7.0 billion: | | | | | | | | | | | | | | | | | |
Fixed-rate 1.800% notes | | | 2019 | | 1,000 |
| | | | | 1.83 | % | | — |
| | | | | — | % |
Fixed-rate 2.000% notes | | | 2020 | | 1,000 |
| | | | | 2.03 | % | | — |
| | | | | — | % |
Fixed-rate 2.400% notes | | | 2023 | | 750 |
| | | | | 2.66 | % | | — |
| | | | | — | % |
Fixed-rate 2.750% notes | | | 2025 | | 1,500 |
| | | | | 2.77 | % | | — |
| | | | | — | % |
Fixed-rate 3.000% notes | | | 2027 | | 1,500 |
| | | | | 3.05 | % | | — |
| | | | | — | % |
Fixed-rate 3.750% notes | | | 2047 | | 1,250 |
| | | | | 3.80 | % | | — |
| | | | | — | % |
Total term debt | | | | | 104,193 |
| | | | | | | 104,021 |
| | | | | |
| | | | | | | | | | | | | | | | | |
Unamortized premium/(discount) and issuance costs, net | | | | | (218 | ) | | | | | | | (225 | ) | | | | | |
Hedge accounting fair value adjustments | | | | | (1,456 | ) | | | | | | | (93 | ) | | | | | |
Less: Current portion of term debt | | | | | (8,784 | ) | | | | | | | (6,496 | ) | | | | | |
Total non-current portion of term debt | | | | | $ | 93,735 |
| | | | | | | $ | 97,207 |
| | | | | |
To manage interest rate risk on certain of its U.S. dollar–denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.
A portion of the Company’s Japanese yen–denominated notes is designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation. As of September 29, 2018 and September 30, 2017, the carrying value of the debt designated as a net investment hedge was $811 million and $1.6 billion, respectively. For further discussion regarding the Company’s use of derivative instruments, refer to the Derivative Financial Instruments section of Note 2, “Financial Instruments.”
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to hedging. The Company recognized $3.0 billion, $2.2 billion and $1.4 billion of interest expense on its term debt for 2018, 2017 and 2016, respectively.
Apple Inc. | 2018 Form 10-K | 56
The future principal payments for the Company’s Notes as of September 29, 2018 are as follows (in millions):
|
| | | |
2019 | $ | 8,797 |
|
2020 | 10,183 |
|
2021 | 8,750 |
|
2022 | 8,583 |
|
2023 | 9,395 |
|
Thereafter | 58,485 |
|
Total term debt | $ | 104,193 |
|
As of September 29, 2018 and September 30, 2017, the fair value of the Company’s Notes, based on Level 2 inputs, was $103.2 billion and $106.1 billion, respectively.
Note 6 – Shareholders’ Equity
Share Repurchase Program
During 2018, the Company repurchased 405.5 million shares of its common stock for $73.1 billion in connection with two separate share repurchase programs. Of the $73.1 billion, $44.0 billion was repurchased under the Company’s previous share repurchase program of up to $210 billion, thereby completing that program. On May 1, 2018, the Company announced the Board of Directors had authorized a new program to repurchase up to $100 billion of the Company’s common stock. The remaining $29.0 billion repurchased during 2018 was in connection with the new share repurchase program. The Company’s new share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Note 7 – Comprehensive Income
The Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on marketable securities classified as available-for-sale.
The following table shows the pre-tax amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial statement line item, for 2018 and 2017 (in millions):
|
| | | | | | | | | | |
Comprehensive Income Components | | Financial Statement Line Item | | 2018 | | 2017 |
Unrealized (gains)/losses on derivative instruments: | | | | | | |
Foreign exchange contracts | | Net sales | | $ | 214 |
| | $ | (662 | ) |
| | Cost of sales | | (70 | ) | | (654 | ) |
| | Other income/(expense), net | | 344 |
| | (638 | ) |
Interest rate contracts | | Other income/(expense), net | | (2 | ) | | 2 |
|
| | | | 486 |
| | (1,952 | ) |
Unrealized (gains)/losses on marketable securities | | Other income/(expense), net | | (20 | ) | | (99 | ) |
Total amounts reclassified from AOCI | | | | $ | 466 |
| | $ | (2,051 | ) |
Apple Inc. | 2018 Form 10-K | 57
The following table shows the changes in AOCI by component for 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| Cumulative Foreign Currency Translation | | Unrealized Gains/Losses on Derivative Instruments | | Unrealized Gains/Losses on Marketable Securities | | Total |
Balances as of September 24, 2016 | $ | (578 | ) | | $ | 38 |
| | $ | 1,174 |
| | $ | 634 |
|
Other comprehensive income/(loss) before reclassifications | 301 |
| | 1,793 |
| | (1,207 | ) | | 887 |
|
Amounts reclassified from AOCI | — |
| | (1,952 | ) | | (99 | ) | | (2,051 | ) |
Tax effect | (77 | ) | | (3 | ) | | 460 |
| | 380 |
|
Other comprehensive income/(loss) | 224 |
|
| (162 | ) |
| (846 | ) |
| (784 | ) |
Balances as of September 30, 2017 | (354 | ) | | (124 | ) | | 328 |
| | (150 | ) |
Other comprehensive income/(loss) before reclassifications | (524 | ) | | 672 |
| | (4,563 | ) | | (4,415 | ) |
Amounts reclassified from AOCI | — |
| | 486 |
| | (20 | ) | | 466 |
|
Tax effect | (1 | ) | | (253 | ) | | 1,177 |
| | 923 |
|
Other comprehensive income/(loss) | (525 | ) |
| 905 |
|
| (3,406 | ) |
| (3,026 | ) |
Cumulative effect of change in accounting principle (1) | (176 | ) | | 29 |
| | (131 | ) | | (278 | ) |
Balances as of September 29, 2018 | $ | (1,055 | ) |
| $ | 810 |
|
| $ | (3,209 | ) |
| $ | (3,454 | ) |
| |
(1) | Refer to Note 4, “Income Taxes” for more information on the Company’s adoption of ASU 2018-02 in 2018. |
Note 8 – Benefit Plans
2014 Employee Stock Plan
In the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the “2014 Plan”) and terminated the Company’s authority to grant new awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of RSUs, stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards. RSUs granted under the 2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. Each share issued with respect to RSUs granted under the 2014 Plan reduces the number of shares available for grant under the plan by two shares. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the 2014 Plan utilizing a factor of two times the number of RSUs canceled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 385 million shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares subject to outstanding awards under the 2003 Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations with respect to RSUs, will also be available for awards under the 2014 Plan. As of September 29, 2018, approximately 280.2 million shares were reserved for future issuance under the 2014 Plan.
Apple Inc. Non-Employee Director Stock Plan
The Apple Inc. Non-Employee Director Stock Plan (the “Director Plan”) is a shareholder-approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the value and relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants, in each case within the limits set forth in the Director Plan and without further shareholder approval. Each share issued with respect to RSUs granted under the Director Plan reduces the number of shares available for grant under the plan by two shares. The Director Plan expires November 12, 2027. All RSUs granted under the Director Plan are entitled to DERs. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. As of September 29, 2018, approximately 1.1 million shares were reserved for future issuance under the Director Plan.
Apple Inc. | 2018 Form 10-K | 58
Rule 10b5-1 Trading Plans
During the three months ended September 29, 2018, Section 16 officers Angela Ahrendts, Timothy D. Cook, Chris Kondo, Luca Maestri, Daniel Riccio, Philip Schiller and Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired pursuant to the Company’s employee and director equity plans.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder-approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 29, 2018, approximately 36.5 million shares were reserved for future issuance under the Purchase Plan.
401(k) Plan
The Company’s 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($18,500 for calendar year 2018). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum 6% of the employee’s eligible earnings.
Restricted Stock Units
A summary of the Company’s RSU activity and related information for 2018, 2017 and 2016, is as follows:
|
| | | | | | | | | | |
| Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value Per RSU | | Aggregate Fair Value (in millions) |
Balance as of September 26, 2015 | 101,467 |
| | $ | 85.77 |
| | |
RSUs granted | 49,468 |
| | $ | 109.28 |
| | |
RSUs vested | (46,313 | ) | | $ | 84.44 |
| | |
RSUs canceled | (5,533 | ) | | $ | 96.48 |
| | |
Balance as of September 24, 2016 | 99,089 |
| | $ | 97.54 |
| | |
RSUs granted | 50,112 |
| | $ | 121.65 |
| | |
RSUs vested | (45,735 | ) | | $ | 95.48 |
| | |
RSUs canceled | (5,895 | ) | | $ | 106.87 |
| | |
Balance as of September 30, 2017 | 97,571 |
| | $ | 110.33 |
| | |
RSUs granted | 45,351 |
| | $ | 162.86 |
| | |
RSUs vested | (44,718 | ) | | $ | 111.24 |
| | |
RSUs canceled | (6,049 | ) | | $ | 127.82 |
| | |
Balance as of September 29, 2018 | 92,155 |
| | $ | 134.60 |
| | $ | 20,803 |
|
The fair value as of the respective vesting dates of RSUs was $7.6 billion, $6.1 billion and $5.1 billion for 2018, 2017 and 2016, respectively. The majority of RSUs that vested in 2018, 2017 and 2016 were net share settled such that the Company withheld shares with value equivalent to the employees’ obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 16.0 million, 15.4 million and 15.9 million for 2018, 2017 and 2016, respectively, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $2.7 billion, $2.0 billion and $1.7 billion in 2018, 2017 and 2016, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.
Apple Inc. | 2018 Form 10-K | 59
Share-Based Compensation
The following table shows a summary of the share-based compensation expense included in the Consolidated Statements of Operations for 2018, 2017 and 2016 (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Cost of sales | $ | 1,010 |
| | $ | 877 |
| | $ | 769 |
|
Research and development | 2,668 |
| | 2,299 |
| | 1,889 |
|
Selling, general and administrative | 1,662 |
| | 1,664 |
| | 1,552 |
|
Total share-based compensation expense | $ | 5,340 |
|
| $ | 4,840 |
|
| $ | 4,210 |
|
The income tax benefit related to share-based compensation expense was $1.9 billion, $1.6 billion and $1.4 billion for 2018, 2017 and 2016, respectively. As of September 29, 2018, the total unrecognized compensation cost related to outstanding RSUs and stock options was $9.4 billion, which the Company expects to recognize over a weighted-average period of 2.5 years.
Note 9 – Commitments and Contingencies
Accrued Warranty and Indemnification
The following table shows changes in the Company’s accrued warranties and related costs for 2018, 2017 and 2016 (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Beginning accrued warranty and related costs | $ | 3,834 |
| | $ | 3,702 |
| | $ | 4,780 |
|
Cost of warranty claims | (4,115 | ) | | (4,322 | ) | | (4,663 | ) |
Accruals for product warranty | 3,973 |
| | 4,454 |
| | 3,585 |
|
Ending accrued warranty and related costs | $ | 3,692 |
|
| $ | 3,834 |
|
| $ | 3,702 |
|
Agreements entered into by the Company may include indemnification provisions which may subject the Company to costs and damages in the event of a claim against an indemnified third party. Except as disclosed under the heading “Contingencies” below, in the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to indemnification of third parties.
The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and mainland China. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within revenue.
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers of the Company, and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. While the Company maintains directors and officers liability insurance coverage, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.
Apple Inc. | 2018 Form 10-K | 60
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased. If the Company’s supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be materially adversely affected. The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.
The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating results.
Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are single-sourced suppliers of components and manufacturers for many of the Company’s products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company’s financial condition and operating results could be materially adversely affected if its outsourcing partners were unable to meet their production commitments. The Company’s manufacturing purchase obligations typically cover its requirements for periods up to 150 days.
Other Off–Balance Sheet Commitments
Operating Leases
The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not currently utilize any other off–balance sheet financing arrangements. As of September 29, 2018, the Company’s total future minimum lease payments under noncancelable operating leases were $9.6 billion. The Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.
Rent expense under all operating leases, including both cancelable and noncancelable leases, was $1.2 billion, $1.1 billion and $939 million in 2018, 2017 and 2016, respectively. Future minimum lease payments under noncancelable operating leases having initial or remaining terms in excess of one year as of September 29, 2018, are as follows (in millions):
|
| | | |
2019 | $ | 1,298 |
|
2020 | 1,289 |
|
2021 | 1,218 |
|
2022 | 1,038 |
|
2023 | 800 |
|
Thereafter | 3,984 |
|
Total | $ | 9,627 |
|
Unconditional Purchase Obligations
The Company has entered into certain off–balance sheet arrangements which require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for supplier arrangements, internet and telecommunication services and intellectual property licenses. Future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year as of September 29, 2018, are as follows (in millions):
|
| | | |
2019 | $ | 2,447 |
|
2020 | 3,202 |
|
2021 | 1,749 |
|
2022 | 1,596 |
|
2023 | 268 |
|
Thereafter | 66 |
|
Total | $ | 9,328 |
|
Apple Inc. | 2018 Form 10-K | 61
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated, as further discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors” and in Part I, Item 3 of this Form 10-K under the heading “Legal Proceedings.” The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims, except for the following matters:
VirnetX
VirnetX, Inc. filed two lawsuits in the U.S. District Court for the Eastern District of Texas (the “Eastern Texas District Court”) against the Company alleging that certain Company products infringe four patents (the “VirnetX Patents”) relating to network communications technology (“VirnetX I” and “VirnetX II”). On September 30, 2016, a jury returned a verdict in VirnetX I against the Company and awarded damages of $302 million, which later increased to $440 million in post-trial proceedings. VirnetX I is currently on appeal at the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”). On April 11, 2018, a jury returned a verdict in VirnetX II against the Company and awarded damages of $503 million. VirnetX II is currently on appeal. The Company has challenged the validity of the VirnetX Patents at the U.S. Patent and Trademark Office (the “PTO”). In response, the PTO has declared the VirnetX Patents invalid. VirnetX has appealed, and those appeals are currently pending at the Federal Circuit. The Federal Circuit has consolidated the Company’s appeal of the Eastern Texas District Court VirnetX I verdict and VirnetX’s appeals from the PTO invalidity proceedings. The Company believes it will prevail on the merits.
Qualcomm
On January 20, 2017, the Company filed a lawsuit against Qualcomm Incorporated and affiliated parties (“Qualcomm”) in the U.S. District Court for the Southern District of California seeking, among other things, to enjoin Qualcomm from requiring the Company to pay royalties at the rate demanded by Qualcomm. As the Company does not believe the demanded royalty it has historically paid contract manufacturers for each applicable device is fair, reasonable and non-discriminatory, and believes it to be invalid and/or overstated in other respects as well, no Qualcomm-related royalty payments have been remitted by the Company to its contract manufacturers since the beginning of the second quarter of 2017. The Company believes it will prevail on the merits of the case and has accrued its best estimate for the ultimate resolution of this matter.
Note 10 – Segment Information and Geographic Data
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.”
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
Apple Inc. | 2018 Form 10-K | 62
The following table shows information by reportable segment for 2018, 2017 and 2016 (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Americas: | | | | | |
Net sales | $ | 112,093 |
| | $ | 96,600 |
| | $ | 86,613 |
|
Operating income | $ | 34,864 |
| | $ | 30,684 |
| | $ | 28,172 |
|
| | | | | |
Europe: | | | | | |
Net sales | $ | 62,420 |
| | $ | 54,938 |
| | $ | 49,952 |
|
Operating income | $ | 19,955 |
| | $ | 16,514 |
| | $ | 15,348 |
|
| | | | | |
Greater China: | | | | | |
Net sales | $ | 51,942 |
| | $ | 44,764 |
| | $ | 48,492 |
|
Operating income | $ | 19,742 |
| | $ | 17,032 |
| | $ | 18,835 |
|
| | | | | |
Japan: | | | | | |
Net sales | $ | 21,733 |
| | $ | 17,733 |
| | $ | 16,928 |
|
Operating income | $ | 9,500 |
| | $ | 8,097 |
| | $ | 7,165 |
|
| | | | | |
Rest of Asia Pacific: | | | | | |
Net sales | $ | 17,407 |
| | $ | 15,199 |
| | $ | 13,654 |
|
Operating income | $ | 6,181 |
| | $ | 5,304 |
| | $ | 4,781 |
|
A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for 2018, 2017 and 2016 is as follows (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Segment operating income | $ | 90,242 |
| | $ | 77,631 |
| | $ | 74,301 |
|
Research and development expense | (14,236 | ) | | (11,581 | ) | | (10,045 | ) |
Other corporate expenses, net | (5,108 | ) | | (4,706 | ) | | (4,232 | ) |
Total operating income | $ | 70,898 |
| | $ | 61,344 |
| | $ | 60,024 |
|
The U.S. and China were the only countries that accounted for more than 10% of the Company’s net sales in 2018, 2017 and 2016. There was no single customer that accounted for more than 10% of net sales in 2018, 2017 and 2016. Net sales for 2018, 2017 and 2016 and long-lived assets as of September 29, 2018 and September 30, 2017 were as follows (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Net sales: | | | | | |
U.S. | $ | 98,061 |
| | $ | 84,339 |
| | $ | 75,667 |
|
China (1) | 51,942 |
| | 44,764 |
| | 48,492 |
|
Other countries | 115,592 |
| | 100,131 |
| | 91,480 |
|
Total net sales | $ | 265,595 |
|
| $ | 229,234 |
|
| $ | 215,639 |
|
|
| | | | | | | |
| 2018 | | 2017 |
Long-lived assets: | | | |
U.S. | $ | 23,963 |
| | $ | 20,637 |
|
China (1) | 13,268 |
| | 10,211 |
|
Other countries | 4,073 |
| | 2,935 |
|
Total long-lived assets | $ | 41,304 |
| | $ | 33,783 |
|
| |
(1) | China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets related to retail stores and related infrastructure. |
Apple Inc. | 2018 Form 10-K | 63
Net sales by product for 2018, 2017 and 2016 were as follows (in millions):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
iPhone (1) | $ | 166,699 |
| | $ | 141,319 |
| | $ | 136,700 |
|
iPad (1) | 18,805 |
| | 19,222 |
| | 20,628 |
|
Mac (1) | 25,484 |
| | 25,850 |
| | 22,831 |
|
Services (2) | 37,190 |
| | 29,980 |
| | 24,348 |
|
Other Products (1)(3) | 17,417 |
| | 12,863 |
| | 11,132 |
|
Total net sales | $ | 265,595 |
|
| $ | 229,234 |
|
| $ | 215,639 |
|
| |
(1) | Includes deferrals and amortization of related software upgrade rights and non-software services. |
| |
(2) | Includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services. Services net sales in 2018 included a favorable one-time item of $236 million in connection with the final resolution of various lawsuits. Services net sales in 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information. |
| |
(3) | Includes sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and other Apple-branded and third-party accessories. |
Note 11 – Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Company’s quarterly financial information for each of the four quarters of 2018 and 2017 (in millions, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
2018: | | | | | | | |
Net sales | $ | 62,900 |
| | $ | 53,265 |
| | $ | 61,137 |
| | $ | 88,293 |
|
Gross margin | $ | 24,084 |
| | $ | 20,421 |
| | $ | 23,422 |
| | $ | 33,912 |
|
Net income | $ | 14,125 |
| | $ | 11,519 |
| | $ | 13,822 |
| | $ | 20,065 |
|
| | | | | | | |
Earnings per share (1): | | | | | | | |
Basic | $ | 2.94 |
| | $ | 2.36 |
| | $ | 2.75 |
| | $ | 3.92 |
|
Diluted | $ | 2.91 |
| | $ | 2.34 |
| | $ | 2.73 |
| | $ | 3.89 |
|
|
| | | | | | | | | | | | | | | |
| Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
2017: | | | | | | | |
Net sales | $ | 52,579 |
| | $ | 45,408 |
| | $ | 52,896 |
| | $ | 78,351 |
|
Gross margin | $ | 19,931 |
| | $ | 17,488 |
| | $ | 20,591 |
| | $ | 30,176 |
|
Net income | $ | 10,714 |
| | $ | 8,717 |
| | $ | 11,029 |
| | $ | 17,891 |
|
| | | | | | | |
Earnings per share (1): | | | | | | | |
Basic | $ | 2.08 |
| | $ | 1.68 |
| | $ | 2.11 |
| | $ | 3.38 |
|
Diluted | $ | 2.07 |
| | $ | 1.67 |
| | $ | 2.10 |
| | $ | 3.36 |
|
| |
(1) | Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share. |
Apple Inc. | 2018 Form 10-K | 64
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 29, 2018 and September 30, 2017, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 29, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Apple Inc. at September 29, 2018 and September 30, 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 29, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), Apple Inc.’s internal control over financial reporting as of September 29, 2018, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 5, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of Apple Inc.’s management. Our responsibility is to express an opinion on Apple Inc.’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as Apple Inc.’s auditor since 2009.
San Jose, California
November 5, 2018
Apple Inc. | 2018 Form 10-K | 65
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on Internal Control over Financial Reporting
We have audited Apple Inc.’s internal control over financial reporting as of September 29, 2018, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 29, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of Apple Inc. as of September 29, 2018 and September 30, 2017, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 29, 2018, and the related notes and our report dated November 5, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
Apple Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Apple Inc.’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
November 5, 2018
Apple Inc. | 2018 Form 10-K | 66